Revolving credit is money that you can borrow as needed, up to a predefined limit. Payments are only required when you use the funds made available to you. And if you do not pay your full balance by the monthly due date, you will have to pay interest on the amount you owe.
Credit cards and home equity lines of credit (HELOCs) are the two most common types of revolving credit. But you can find a complete list of examples in the table below.
| Revolving Credit Examples | |
|---|---|
| Credit Cards | Business Line of Credit |
| Store Credit Cards | Margin Investment Account |
| Home Equity Lines of Credit | Deposit Accounts with Overdraft Protection |
| Personal Line of Credit | Info |
It’s important to note that revolving credit is different than an installment loan, which entails borrowing a lump sum to be repaid in installments over a fixed period of time. For one thing, installment loans are typically designated for a particular purpose, such as buying a house or a car. But revolving credit can usually be used for anything. Revolving credit accounts also tend to be unsecured given the lack of property to act as collateral.
Below, you can learn more about revolving credit, including how credit lines fit into things and how revolving credit affects your credit score.
What Is A Revolving Line Of Credit?
Revolving credit is often referred to as a credit line or a line of credit. It’s just industry jargon, but you can use it as a memory aid. Much like a fisherman would reel in his line upon getting a bite and then toss it back after re-baiting the hook, a revolving credit user taps into his or her credit line when the need arises and subsequently pays for the amount used to retain borrowing privileges moving forward.
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Revolving Credit & Your Credit Score
Revolving credit definitely has its advantages. For one thing, you aren’t required to borrow money when using a revolving line of credit. That means you can build credit without risking anything or owing anyone. For example, even if you don’t make purchases with a credit card, you’ll still be credited with paying on time and maintaining low credit utilization. And that will lead to credit improvement over time.
But you’ll build credit faster if you use a modest amount of your credit limit each month and always pay your bill in full. You just don’t want to use too much of your available credit or pay your bill late. It’s best to keep your credit utilization below 40% and to avoid ever allowing it to surpass 80%, as that is where damage begins and intensifies, respectively. And if you ever do miss a payment, remember that the damage will worsen the more delinquent you become.
Finally, it’s important to touch on the downsides of revolving credit’s unsecured nature. While the lack of collateral saves you from having your car repossessed or your home foreclosed upon, it also makes you more susceptible to lawsuits and collections accounts if you become severely delinquent or default. If you would like to see what revolving credit accounts are currently on your credit report and check your latest credit score, you can do so on WalletHub – the only service that offers free daily updates to your score and report. Reviewing this information on a regular basis is the best way to ensure you’re on the path to Top WalletFitness®.