There are many different ways to get financing in the world today. Revolving credit is a great way to do this, and there are many ways in which you can access this type of credit.
Ready to learn more about how revolving credit accounts can help meet your financial needs while building your credit score at the same time?
What is revolving credit?
A revolving credit account is a type of account that gives you access to a line of credit from a lender that you can withdraw and repay on your own schedule. As you pay off the outstanding balance, you have access to use those funds again if and when you wish to do so.
It’s essential to use your revolving credit wisely. If you don’t pay off your balance in full each month, you’ll begin accruing interest. Depending on the types of revolving credit accounts you use, your interest rate could range widely.
How does revolving credit work?
When a creditor approves you for revolving credit, they give you a credit limit. This credit limit is the maximum amount of money you have access to. You can keep your revolving credit account open for months or years until you close the account.
Here are some types of revolving credit available to consumers.
Examples of Revolving Credit
Perhaps the most common type of revolving credit is a credit card. Credit card companies require a minimum payment each month, but you can set your schedule for repaying the bulk of the balance.
Just as with any type of financing, you’ll pay interest on your outstanding credit card balance. The average APR for a credit card is around 16%, but it can also go much higher depending on your credit score and payment history on the credit card.
Home Equity Lines of Credit
Another type of revolving credit is a home equity line of credit or HELOC. If you own a home and have enough equity, you can apply to borrow funds up to a percentage of that equity. Rather than receiving a lump sum, you draw funds from your line of credit as you need them.
The benefit here is that you’re not paying interest on the money you’re not using. So, for example, if you use your line of credit for a home renovation, you can withdraw funds each time you need to make a purchase or hire a contractor.
If the project is spread out over a period of time, you can save yourself money on accruing that interest. Plus, HELOC rates are typically much lower than those associated with credit cards and even personal loans.
How does revolving credit affect your credit score?
One benefit of having a revolving credit account is that lenders typically report your positive payments to the major credit bureaus. So if you want to build your credit from scratch or repair it from past financial issues, then revolving credit is one way to do that.
Used responsibly, a revolving line of credit can help strengthen your credit report and credit score. As long as you keep your credit utilization ratio relatively low (your available credit compared to your credit limit) and make at least the minimum monthly payment on time, you can successfully build a positive credit history.
Revolving Credit vs. Installment Credit
There’s a big difference between revolving credit and an installment loan — most notably in how the borrowed funds are repaid. We discussed how you can pay revolving credit at your own pace while accruing interest.
With installment loans, on the other hand, you have fixed monthly payments. The principal and interest are spread out over a predetermined repayment term. For example, you may have an installment loan that lasts over the course of three years.
As long as you agreed to a fixed interest rate, your payment is due in full every month, and the amount should be the same each time (assuming you’ve paid on time in the preceding months.
Lines of revolving credit typically don’t have fixed interest rates but instead have variable APRs. Credit card issuers can increase your rate at certain times, including if you miss payments.
A HELOC is typically tied to the prime rate. So whatever that number is set at, you can usually expect to pay a point or two more. Depending on your lender, there may be a cap on how high the rate can go.