Understanding Revolving Credit: How It Works and How to Use It

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Revolving credit is one of the most common ways to borrow money from a lender. Most likely, you’re far more familiar with the concept than you realize. Frequently used in the form of a credit card, revolving credit is when a lender extends the same amount month after month. Use this credit however you like — at the grocery store, on plane tickets, or for a last minute emergency. As long as you continue to make timely payments, your credit line should remain available.

This setup is ideal for timing out your everyday cash flow. For example, say you have a surprise expense in the middle of the month but won’t have the money to cover it for two weeks. Revolving credit stands in until you can pay off your balance. If you’re unable to pay the full amount within that monthly cycle, you then pay a percentage of the amount in interest until the balance reaches zero.

Unlike non-revolving credit — where you borrow one specific amount and then pay it off — your revolving credit limit remains the same each month and the available amount fluctuates as you make payments and charges.

Grasping how revolving credit works is a doorway into understanding your own credit and financial health. It shines a light on how lenders handle interest rates and minimum payments, and can help you understand when revolving credit should and shouldn’t be used in daily life. This way, you can begin the journey toward building good credit, with or without a credit card.

How Does Revolving Credit Work?

Think of revolving credit like a set, monthly loan. The loan’s limit stays the same and available credit changes by how much or how little you pay off of any past balances. Pay off the whole amount and the total remains available. Leave a balance and you still have the remaining credit there for your use.

When you apply for revolving credit, your lender determines your credit limit based on your credit report. Each company and type of credit card has a different method for determining the right credit limit amount for you. Some high-end credit cards forego the spending limit altogether, but often require borrowers to pay off the full balance at the end of each month.

The most popular types of revolving credit are credit cards and Home Equity Lines of Credit, or HELOCs. Though HELOCs borrow against the equity of your home, they function similarly to a credit card. Your credit limit remains available within a specified “draw period,” usually over five or ten years. Many department store and gas credit cards now also offer revolving accounts.

At the start of every new cycle, lenders will send your total charges from the prior month. You will then have a preset amount of time to either pay off the full balance or make a minimum payment. Any remaining balance will be charged an interest fee until it’s paid. No matter what, the same limit of credit remains available.

Borrowers open revolving credit accounts for several reasons. While credit cards are logistically helpful for making one-time large purchases, they also stand in as an emergency fund for unexpected, but necessary charges. This allows you to keep your cash in your bank account and pay off the larger charge over several weeks to align with your income schedule.

Revolving credit is also one way to build your credit score. For many, tools like credit cards, HELOCs and department store cards act as an introduction to understanding their own borrowing and spending habits.

What Is the Difference Between Revolving and Non-Revolving Credit?

Lenders help people across the world reach financial goals with the understanding that it’s often difficult to purchase high-priced items in one cash payment. Revolving and non-revolving credit offer early access to funds in different ways. While revolving accounts remain available for as long as you keep the card active, non-revolving credit allows borrowers to make large, one-time purchases with the goal of paying down the balance in a set amount of time.

Non-revolving credit often comes in the form of a loan. A car, home, business, or student loan helps borrowers launch a new phase in their lives. Once they’ve opened this loan, monthly payments of a predetermined amount pay the loan down over a period of time. Similar to revolving credit, the lender chooses an interest rate based on the borrower’s credit score and history.

The major difference between the two types is that non-revolving credit does not remain available after the initial lending. Say you borrow $10,000 to purchase a car. Though the lender agreed to grant this amount, once you pay down the total, you cannot make purchases from that line of credit again.

Each type of credit has its own purpose. Non-revolving credit makes much more sense for large sums of money since the borrower agrees to begin paying down the amount immediately. Revolving credit, however, leaves the door open for regular monthly costs as life ebbs and flows.

How to Effectively Use Revolving Credit

As mentioned earlier, revolving credit accounts can sometimes help improve your credit score. Credit cards allow you to start small — making manageable purchases and paying off the balance each month to avoid interest charges. Over time, lenders will see that you are a trustworthy spender and may raise your credit limit or even lower your interest rate.

Nevertheless, there are some ways you can  go wrong when using revolving credit. Unplanned purchases might be more tempting, so consider a few tips for effectively using revolving credit.

Only Borrow What You Need

It’s true — building a range of revolving and non-revolving accounts can be good for your credit score. That doesn’t mean, however, that opening accounts for the sake of credit diversity is always a smart move.

Retail stores, for example, offer discounts and signing deals for their own lines of credit. Having one of two of these in your wallet can sometimes make sense if you frequently head to that store. Just be sure you always have the cash to cover those expenses.

Having too many cards at once may send up a red flag to lenders. It could appear that borrowers are spending more than they have. So in short, only open cards as you need them for specific areas of your life and if you’re ever unsure if you should open a card, consider consulting a financial advisor.

Always Have a Payoff Plan

It’s a common misconception that credit cards should be used for splurge purchases. It’s usually best to only use your card when you can designate income from the near future to cover the balance. For example, if you planned to use cash for your grocery budget, you can choose to use your credit card and immediately pay off the amount.

If you have to make a large purchase, such as in an emergency or when your car needs a necessary repair, tailor your budget to pay off the expense in a specific amount of time.

Carrying a small balance from month to month will not significantly affect your score if you stay below the recommended 30% utilization rate.

Read All The Fine Print

Many credit cards offer cash-back and travel deals for qualifying borrowers. These are helpful in situations when you know you can safely make purchases on your card and immediately pay them off. It also can take some time to save up enough points for travel, so be sure to fully understand the conditions before signing on for more credit or an annual fee.

For peace of mind, consult a financial expert before applying for a new card that you feel is right for you.

Make Smart Purchases

On the other hand, revolving credit accounts with perks can sometimes be used quite strategically. If you travel often for work or have a large, budgeted expense on the horizon — such as a wedding — using cash-back cards can be the way to go.

Credit cards are also ideal for hotel reservations or any small purchase that requires a security hold. If you use your card for these purposes, always track when and how you plan to cover the balance.

Create Personal Guidelines

Revolving credit’s accessibility can make spur-of-the-moment purchases more tempting. In the early days of credit card use, lay out some personal guidelines for yourself. For example:

  • Keep your credit card at home when you run errands or go shopping
  • Try not to link your credit card to online accounts
  • Designate a date each month to check in with your budget and payment schedule

Revolving credit is a dynamic tool that can be used for both building your credit score and balancing life’s expenses. Successfully using revolving credit can help you learn to handle borrowed money, plan for important purchases, and manage life changes.


FORA Financial | US News | The Balance