What is Revolving Credit?

If you’ve ever used a credit card to pay for groceries or taken out a line of credit to cover home repairs, you’ve probably used revolving credit. Revolving credit allows you to borrow money as needed up to a certain limit set by your lender.

Let’s explore how revolving credit works, how it compares to installment credit and how it could impact your finances.

What is revolving credit?

Revolving credit is a type of credit account that you can use to borrow money up to a specific amount — called a credit limit — repay and borrow again as needed. A few examples include:

• credit card
• Home Equity Line of Credit (HELOC)
• personal line of credit

How does revolving credit work?

With revolving credit, the lender gives you a credit limit which is the maximum amount of credit you can access on your account. Every time you buy something with your revolving credit, it reduces your available credit and adds to your balance.

At the end of each billing period — usually every month — you get a statement showing all your charges, your current balance and a required minimum payment. The minimum payment may be a certain percentage of your balance or a fixed amount. You don’t need to repay the entire balance. As long as you pay the minimum on time, your account will remain in good standing.

However, if you don’t pay off the entire balance, you’ll be charged interest (the cost of borrowing) on the amount you carry over. Your lender calculates interest based on the annual percentage rate (APR) listed in the account’s terms and conditions.¹ The APR represents the total cost of borrowing including interest and fees over the course of one year. The interest charged is added to your balance.

Because revolving credit interest gets added to your outstanding balance, not just your principal (the amount you originally charged), you may be charged interest on top of previously charged interest if you carry a balance for more than a month. If you don’t repay your balance promptly, your debt could balloon very quickly and paying it off could become more difficult.

You may avoid interest charges if you understand and take advantage of the grace period, if your revolving credit account has one. The grace period is the fixed period of time between when your account statement is created and the date your payment is due. If you pay your balance in full by the payment due date, no interest charges will be added to the balance. Be aware that your credit card provider or lender may not apply a grace period to all transactions, such as cash advances.² Review your account agreement to make sure you understand all the rules.

To pay off revolving credit debt, you need to pay more than the required minimum each month. You can see how much you owe on your statement. Keep in mind that some forms of revolving credit, like credit cards, don’t have a set final payoff date. If you want to pay off your debt by a certain date, you’ll need to calculate how much you need to pay every month in order to bring your balance down to zero by that date.

Revolving credit vs installment credit

Revolving credit works differently than installment credit.

Revolving credit is open-end. As long as you pay at least the monthly minimum and have credit available, you can continue to using revolving credit until you pay off your balance and close the account. Think of it as a pool of credit you can tap into when you need and replenish when you can.

Installment credit is closed-end. Installment credit is a lump sum of money you borrow and repay in fixed payments over a set period, called the loan term. Examples include personal loans, auto loans and mortgages. You may be allowed to pay more than you owe in a given month to help reduce your installment debt more quickly, depending on your agreement. If you’re having trouble making your full payment on an installment-type loan, you will generally need to speak to your lender.

	Revolving Credit	Installment Credit
Type of Account	Credit card, HELOC, personal line of credit	Personal loan, mortgage, auto loan
How Funds are Borrowed	Borrow as needed, up to your credit limit	Borrow full amount upfront
Repayment Schedule	Varying monthly payments based on the balance for as long as the account is open	Fixed monthly payments with a set payoff date
How Interest is Charged and Calculated	Based on APR, charged daily on outstanding balance unless paid off within the grace period	Calculated according to a set schedule, lenders define how much of each fixed payment goes toward interest versus the principal

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How does revolving credit affect your credit score?

Your credit score is a three-digit number that helps lenders assess your risk as a borrower. A higher number means you’re more likely to be able to repay a loan. Revolving credit affects your credit score in a variety of ways, but the most significant are:

• Payment history: Your payment history is the most important component of your credit score as it helps lenders predict your ability to repay a loan based on your past activity. The more you use revolving credit responsibly, the more you could help boost your credit score.³
• Credit utilization ratio: Your credit utilization ratio is the percentage of total revolving credit you have in use compared to the total credit you have available. The general guidance is to try to use less than 30% of your available credit at a time.⁴

These two factors make up about two-thirds of your credit score.⁵ Other factors include the length of your credit history, how many different types of credit accounts you have and whether you’ve recently applied for new credit.

Take charge of your borrowing power

Revolving credit may help you build your credit when used responsibly. However, try not to use more than you can reasonably repay. Understanding how revolving credit works and using it wisely can help you take advantage of it without taking on more debt than you can handle.

Sources

1 https://www.nerdwallet.com/credit-cards/learn/credit-card-interest-calculator
2 https://www.consumerfinance.gov/ask-cfpb/what-is-a-grace-period-for-a-credit-card-en-47/
3, 5 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
4 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/