Revolving credit is a type of credit where a consumer’s balance and minimum monthly payment can change This credit also allows for cardholders to have the option of avoiding charges by paying the minimum statement balance within the established “grace period.” This type of credit account also has a spending max.
In this guide, we will breakdown everything you need to know about revolving credit.
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How Does a Revolving Credit Account Work?
A revolving credit account lets people use money up to a maximum cap. People are able to withdraw all or part of the usable funds and choose to either repay a part or all of the balance Minimum payments are usually due each month, but the amount depends on the terms of the loan agreement.
How is Revolving Credit Different from Installment?
The two major types of credit are revolving credit and installment credit. Installment loans allow you to borrow a set amount of money each month that you will have in usable credits. Once you are able to pay off the installment loan, the account will close. Revolving credit, on the other hand, lets you accumulate your charges until you hit your spending limit. Revolving credit allows more flexibility on spending each month as long as you are able to pay off your statement on time.
If you cannot pay off your statement in full, then the remaining balance on your account will be subject to interest. It is highly recommended that you pay off your statement in full if you are able to do so. If you are not able to pay, maybe a revolving credit card is right for you.
Non-Revolving Credit Defined
Non-revolving credit is different from revolving credit in one specific way. Non revolving credit cannot be used again after the statement has been paid off. An example of non revolving credit would be a school student loan. Once you pay off your student loans, you will not be able to use your money that you borrowed again.
Non-revolving credit products often have a lower interest rate compared to revolving credit. This is because of the lower risk associated with non-revolving credit products.
Once you pay off a non-revolving credit account, the account is closed and can’t be used again. You’ll have to make another application and go through the approval process to borrow additional funds.
How can revolving accounts impact your credit?
There are a few ways a revolving credit account can impact your credit.
- When you apply for the account, the creditor will likely review your credit history, typically resulting in a hard inquiry (which could lower your credit scores by a few points or have a negligible effect on them).
- Opening a new account may also lower your average age of accounts, which might lower your scores.
- You could also be adding to your mix of credit, which may improve your credit health.
Fees to watch out for
Be aware that accounts typically charge fees. For example …
- Credit cards often charge a number of fees, like an annual fee and transaction-related fees (e.g., foreign transaction fee, cash advance fee)
- Lines of credit can also charge fees, like an annual fee or origination fees
- A HELOC can come with a host of fees on top of an annual fee (e.g., closing costs)
Conclusion
Whether you use a credit card to conveniently pay your bills each month or take out money to finance your needs, revolving credit offers a useful way to pay for both ongoing purchases and one-time expenses. When you use it responsibly, revolving credit can help you manage your cash flow and build a good credit score—both of which are key to a healthy financial life.
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