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 can help meet your financial needs while building your credit score at the same time.
Then keep on reading.
What is revolving credit?
Revolving credit is when you have access to a line of credit from a lender and can withdraw and repay funds on your own schedule. As you pay off the outstanding balance, you then have access again to use those funds if and when you wish to do so.
One perk about having revolving credit 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.
Obviously, it’s important 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 product you use, your interest rate could range widely.
What 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. You have a balance limit and can’t charge anymore once you hit that number. Credit card companies required a minimum payment each month, but you can set your own schedule for repaying the bulk of the balance.
Just as with any type of financing, you’ll pay interest on your outstanding 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 card.
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 simply draw funds from your line of credit as you need them.
The benefit here is that you’re not paying interest on money you’re not using. So, for example, if you use the funds for a home renovation, you can make a withdraw each time you need to make a purchase or hire a contractor.
If the project is spread out over 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.
What’s the difference between revolving credit and a loan?
There’s a big difference between revolving credit and an installment loan — most notably in the way the borrowed funds are repaid. We discussed how you can pay revolving credit at your own pace while accruing interest.
With a loan, 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 a 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 each 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, and instead, have variable APRs. Your credit card 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.
Used responsibly, a revolving line of credit can help strengthen your credit score. As long as you keep your balance relatively low compared to your limit and make at least the minimum payment on time, you can successfully build a positive credit history.