What Is Revolving Credit? (2024)

Unlike a nonrevolving line of credit, a revolving line of credit enables you to borrow money for daily expenses or an emergency and pay the balance over time. Revolving credit can enable business owners and households to manage their cash flow better, cover unexpected expenses and plan their budgets.

We see many examples of revolving credit, including personal lines of credit and home equity lines of credit, which can be useful for home remodeling and repairs. Credit cards are a popular form of revolving credit and can be used for large and small expenses while offering travel rewards, cash back and repayment flexibility.

Newer credit borrowers generally have easier access to credit cards, while banks may be more strict in approving personal lines of credit and HELOCs.

How Revolving Credit Works

With a revolving line of credit, borrowers get access to a set amount of funds that can be borrowed, repaid and then borrowed again. This feature makes revolving lines of credit a useful option for individuals and businesses who want to use it to pay for ongoing expenses or manage cash flow.

The set amount of funds is defined by a credit limit, the maximum amount a borrower can spend on the account. As you spend more on the revolving credit account, your balance accumulates. You’ll compile a transaction history and all your charges will appear on your bill at the end of the billing cycle.

If you completely pay off the revolving credit statement balance in full and on time at the end of the billing cycle, you’ve settled the account and can enjoy using the whole credit limit again in the next billing cycle.

If you make the minimum payment or any amount less than the statement balance, you’ll be charged interest on the balance carried over in each subsequent month. The available credit limit in the next statement cycle will decrease by the balance and interest charges that “revolved” into the next billing cycle.

A minimum payment could be a fixed amount or a percentage of the total statement balance; details can be found in your revolving credit agreement. Sometimes, newly issued credit cards or lines of credit have promotional rates, like a 0% interest introductory period. It’s important to remember to pay off the balance in full at the end of the introductory period to minimize interest payments.

How Revolving Credit Is Different From Nonrevolving Credit

Installment loans are a type of nonrevolving credit. They usually require a fixed number of payments over a set period. In contrast, revolving credit requires only a minimum payment plus interest and fees. Revolving credit is intended for short-term borrowing and small loans, while installment loans are intended for long-term and large loans to purchase cars, education, business equipment or homes.

Revolving credit can impact your credit score faster—in both directions. Once you pay your statement balance off or run up a big bill, you’ll see those impacts within one to two months.

How To Get Revolving Credit

Revolving credit is available from banks and other lending institutions, and the application process is similar to a traditional loan. Carefully review the terms of your credit application and follow these steps to apply for a personal or business revolving credit line.

1. Choose a lender
2. Compile the necessary documentation
3. Complete an application
4. Identify collateral and have it appraised (if secured)
5. Wait for the loan underwriter’s review
6. Receive approval and close on the line of credit

Approval time can vary depending on the complexity of your application, the type of credit application or the lender’s review process. For example, a secured line of credit will likely require additional time for your lender to review your collateral, have it appraised and confirm that it meets minimum requirements.

Pros of Revolving Credit

• Flexibility. Revolving credit allows individuals and businesses to borrow what they need and pay it back over time or at the end of the billing cycle. Credit cards, personal lines of credit and HELOCs are especially flexible, with few restrictions on how borrowers may use the money.
• Easy application process. Borrowers may often be approved within minutes.
• Lower interest rates compared to some other ways to borrow money. Interest rates on revolving credit are generally lower than cash advances or payday loans. Rates are even lower for HELOCs.
• Collateral may be optional. Unless you apply for a secured line of credit, collateral is typically not required to open a line of credit.
• Continuous access to funds. With a revolving line of credit, borrowers can repeatedly draw on and repay the account balance.
• Limited interest. Unlike a traditional loan, interest on revolving credit is limited to what you actually borrow.

Cons of Revolving Credit

• Good to excellent credit is likely required. Lenders typically reserve lines of credit for borrowers with good or excellent credit. The credit requirements for secured lines are usually lower than those for unsecured.
• Maintenance or annual fees. Depending on the lender, annual maintenance fees or cardmember fees may be charged to the account. Borrowers may also be subject to late or returned payment fees.
• Higher, more variable interest rates compared to nonrevolving credit. Average interest rates may be higher than nonrevolving credit products, like mortgages and auto loans.
• Interest is not tax-deductible. Accrued interest is generally not tax-deductible, unlike mortgages, student loans, and business loans, accrued interest. Although business credit cards can help segregate business expenses, personal expenses charged to business accounts are not tax-deductible.
• Can negatively impact credit score. Poorly managed credit, both revolving and nonrevolving, can damage your credit score if you fail to make timely payments or carry a high balance over time.

Revolving Credit Can Be a Useful Financial Tool

All types of credit affect your credit score, but revolving credit accounts can help or hurt your score more quickly, depending on how they’re managed. If you’re a new borrower with no or little credit history, using a secured credit card for small purchases and paying in full and on time every month can help build a good credit score.

Credit utilization, age of credit, number of inquiries and payment history all impact your credit score. Revolving credit can impact all these categories.

Here are some key tips for maintaining a good credit history with revolving credit:

• Set up auto-payment on the minimum payment (or the full balance). You’ll automatically make payments on time by setting up auto-payment for at least the minimum payment. Payment history is the largest portion of your score (35%).
• Call your credit card company to increase your credit limits as often as once every six months. Obtaining a higher credit limit can help to reduce your credit utilization. However, be aware that the issuer could do a hard credit check, temporarily lowering your score.
• Pay off your balance more than once per month. Balances are reported once a month (or at least every 45 days), but many people receive paychecks more than once per month. It may help with your cash flow to pay your revolving credit balances every time you receive a paycheck.

Is Revolving Credit for You?

Revolving credit can be used to conveniently pay your mobile phone bill every month with a credit card or remodel your kitchen with a HELOC. These can be useful for ongoing purchases as well as one-time expenses. When used responsibly, revolving credit can help you manage cash flow and build a strong credit score, which is key to healthy personal finances.