What is Revolving Credit?

Ever used a credit card? That's revolving credit in action. It's a handy way to pay for big expenses, everyday purchases, and earn rewards. You get a credit limit you can spend up to, pay back, and use again.

Here's what you should know about it.

How revolving credit works

When you open an account, you get a credit limit. At the end of each billing cycle, you have two choices:

1. Carry over part of the balance (you must make at least the minimum payment). Unless there's a 0% intro rate, interest gets added to what you owe.

2. Pay the full balance by the due date and avoid interest charges.

Common types of revolving credit

Credit cards: Use up to your limit, then repay what you spent plus any fees. Pay in full during the grace period (usually 21-30 days after billing) to avoid interest. Many cards offer rewards and benefits like extended warranties.

Personal line of credit: Borrow money up to your limit during a "draw period" (typically 3-5 years). Repay in variable monthly amounts. Your available credit gets restored as you pay.

Home equity line of credit (HELOC): Like a personal line of credit but uses your home as collateral. You can typically borrow 60-85% of your home's equity.

Revolving vs. installment loans

Installment loans (like mortgages or car loans) give you a lump sum that you repay in fixed monthly payments over a set period. Unlike revolving credit, you can't reborrow as you pay it down.

Pros of installment loans: Predictable payments make budgeting easier, and you might save on interest by paying off early.

Cons: No payment flexibility, and you could lose collateral if you miss payments.

How revolving credit affects your credit score

Ways it can hurt:

• Missing payments can damage your score significantly

• Using more than 30% of your available credit can lower your score

• Closing accounts reduces your total available credit

• New applications create hard inquiries that temporarily drop your score

Ways it can help:

• On-time payments boost your score (consider setting up autopay)

• Having credit accounts builds your credit history

• Having both revolving and installment accounts improves your credit mix

Take control of your revolving credit

Revolving credit offers flexibility that installment loans can't match, but requires more discipline. To get the most from it, pay your bills on time, keep balances low, and monitor your credit regularly.

Before applying for new credit, check your credit report and score, you might want to improve your score first to qualify for better terms and lower interest rates.

Used wisely, revolving credit can be a powerful tool in your financial toolkit rather than a path to mounting debt.