Apr 18, 2023
Fact checked
Written by John S Kiernan
WalletHub Managing Editor
Fact Checked by Alina Comoreanu
WalletHub Senior Researcher
Revolving credit is a borrowing arrangement where funds are made available for a borrower to use as needed, and the available funds replenish when the borrower makes a payment toward their balance. Revolving credit accounts such as a credit card or personal line of credit do not have a specified end date.
You can keep a revolving credit account in good standing by making at least a minimum payment each month. Any unpaid balance above the minimum will carry over to the next billing cycle.
Key Things to Know About Revolving Credit
- Uses: Revolving credit allows you to borrow money repeatedly up to a set limit that is paid back over time. It can be used for everyday purchases and large purchases, such as home improvement projects.
- Types: Credit cards, store credit cards, home equity lines of credit, personal lines of credit, business lines of credit, and margin investment accounts are examples of revolving credit.
- Disadvantages: Revolving credit accounts tend to have higher interest rates and lower borrowing limits than traditional installment loans, like personal loans.
- How to get it: You can get a revolving credit line by applying for one through a bank or credit union. If you are eligible and approved, you can borrow funds as many times as you want as long as the account remains open and you make the necessary payments.
It’s important to note that revolving credit is different than an installment loan, which entails borrowing a lump sum to be repaid in installments over a fixed period of time. For one thing, installment loans are typically designated for a particular purpose, such as buying a house or a car. But revolving credit can usually be used for anything. Revolving credit accounts also tend to be unsecured, with no property acting as collateral.
Below, you can learn more about revolving credit, including how revolving credit affects your credit score.
What Is A Revolving Line of Credit?
Revolving credit is often referred to as a credit line or a line of credit. It’s just industry jargon, but you can use it as a memory aid. Much like a fisherman would reel in his line upon getting a bite and then toss it back after re-baiting the hook, a revolving credit user taps into his or her credit line when the need arises and subsequently pays for the amount used to retain borrowing privileges moving forward.
Revolving Credit & Your Credit Score
Revolving credit definitely has its advantages. For one thing, you aren’t required to borrow money when using a revolving line of credit. That means you can build credit without risking anything or owing anyone. For example, even if youdon’t make purchases with a credit card, you’ll still be credited with paying on time and maintaining lowcredit utilization. And that will lead to credit improvement over time.
But you’ll build credit faster if you use a modest amount of your credit limit each month and always pay your bill in full. You just don’t want to use too much of your available credit orpay your bill late. It’s best tokeep your credit utilization below 30%and to avoid ever allowing it to surpass 80%, as that is where damage begins and intensifies, respectively. And if you ever do miss a payment, remember that the damage will worsen the more delinquent you become.
Finally, it’s important to touch on the downsides of revolving credit’s unsecured nature. While the lack of collateral saves you from having your car repossessed or your home foreclosed upon, it also makes you more susceptible to lawsuits and collection accounts if you become severelydelinquentor you default.
If you would like to see what revolving credit accounts are currently on your credit report and check your latest credit score, you cando so for free on WalletHub. You can even get free daily updates. Reviewing this information on a regular basis is the best way to ensure you’re on the path to Top WalletFitness.
Revolving Credit FAQ(7 questions)
What does revolving credit limit mean?
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A revolving credit limit is just the maximum amount you can keep borrowing from your line of credit. Revolving credit accounts, like credit cards or personal credit lines, are open-ended, meaning they don't have an ending date. This means that you can borrow money repeatedly, as long as the credit account is open and in good standing. As soon as you pay back what you owe, you can use your whole available credit for new...
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What does revolving credit mean?
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WalletHub
@WalletHub
A line of credit that allows consumers to pay all or part of an outstanding balance. As the balance is paid, it becomes available to spend again as credit.
A credit card or a home equity line of credit are forms of revolving credit, because you are given a credit limit and as you pay down your balance you get more available credit at your disposal.
What are the 3 types of credit?
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WalletHub
@WalletHub
The 3 types of credit are: revolving, installment, and open accounts. These types of credit vary based on term length (fixed or indefinite), payment (fixed or variable), and monthly amount due (full balance or minimum). Ideally, it's best to have a variety of these types of credit as this will create a good credit mix, which makes up 10% of your overall credit score. The characteristics of each type of credit are listed below.
3 Types of Credit Accounts:
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What is a debt-to-credit ratio?
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WalletHub
@WalletHub
A debt-to-credit ratio is a measure of the amount of debt you owe compared to the total of your credit limits on revolving credit accounts. Revolving credit includes credit cards and lines of credit. Debt-to-credit ratio is another way of saying credit utilization.
Here's an example of a debt-to-credit ratio calculation.
Let's say that you have two credit cards. Card A has a $5,000 credit limit and Card B has a $10,000 credit limit. You...
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How can I calculate my credit utilization ratio?
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Sydney Garth, Credit Cards Moderator
@sydneygarth
To find that utilization ratio, simply divide your current balance by your total available credit. For example, if you have $2,000 balance and $10,000 in available credit, the percentage would be 20%.
Generally, you should aim to keep your credit utilization below 30%, both overall and on individual accounts. You can find your credit utilization in your Credit Analysistab on WalletHub.
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Whats the difference between installment loans and revolving credit?
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Gino Rodriguez, Writer
@gino_rodriguez
The difference between installment loans and revolving credit is that installment loans distribute funds in a lump sum, whereas revolving credit gives you access to funds as needed. Installment loans are thus repaid in fixed monthly installments, and revolving credit is paid each month based on how much you spend.
Plus, when you make a payment toward a revolving line of credit, your spending power is replenished. This means that as you pay down your balance, your available credit will increase by the amount you paid. Unlike installment loans, revolving credit doesn't have a specific end date, so you have constant access to funds. You can learn more about how installment loans and revolving credit are different below.
Installment Loans vs. Revolving Credit
Category | Installment Loans | Revolving Credit |
Access to funds | Distributed in a lump sum via electronic transfer or check | Accessed as needed |
Monthly payments | Fixed monthly installments | Based on how much credit is used |
Interest rates | Lower | Higher |
Collateral requirement | Secured and unsecured options available | Secured and unsecured options available |
Common types of installment loans include personal loans, mortgages and auto loans. Revolving credit typically refers to credit cards, but there are other types of revolving credit as well.
Types of Installment Loans
- Mortgages
- Personal loans
- Auto loans
- Student loans
- Home improvement loans
Types of Revolving Credit
- Credit cards
- Personal lines of credit
- Home equity lines of credit
Choosing Between Installment Loans and Revolving Credit
Installment loans and revolving credit have their differences, but choosing between the two comes down to how much you need to borrow and what you need the money for. Installment loans may be better for larger purchases that you want to repay over a long period of time. On the other hand, a revolving line of credit such as a credit card might be better for everyday purchases.
Finally, installment loans and revolving credit do share an important similarity. The two are similar in that payment information from the creditor or lender is reported to the major credit bureaus, which can help or hurt your credit score, depending on whether you pay the bills on time. You can check out WalletHub's free credit score simulator to see how taking out a loan or getting a line of credit will impact your score.
When getting a loan what is a good revolving credit amount
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