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- Revolving credit refers to money you can borrow, pay back, and then borrow again, like credit cards.
- Revolving credit accounts are more flexible than installment loans but have higher interest rates.
- It's easy to overspend with revolving credit, so manage your spending and pay off your debt monthly.
- Getting started with credit? Check out our list of the best starter credit cards.
There are three types of credit: open credit, installment loans, and revolving credit.
Installment loans are typically large sums of money borrowed at once that you pay off in small increments over time. These are often used for milestone purchases such as a house or a car. Open credit allows you to borrow up to a certain limit, but the entire amount must be paid off at the end of a billing period. These are often used for reoccurring bills, like utility bills or phone bills.
Revolving credit is for everyday purchases, offering flexibility where installment loans and open credit fall short. Here's how it works:
What is revolving credit?
Revolving credit lets you borrow money up to a certain limit whenever you want. Every time you make a purchase, the amount is subtracted from your total credit limit. As you make payments, your credit limit goes back up, so you can turn around and borrow more.
The most common example of revolving credit is a credit card. If you have a credit card with a $10,000 credit limit and you make a $2,000 purchase, you only have $8,000 left to spend. Once you pay back the $2,000, though, your limit will be back up to $10,000.
Lines of credit are another example of revolving credit. Personal and home-equity lines of credit (HELOC) are common choices for those who need to borrow large amounts of money on a flexible schedule.
Revolving credit offers greater flexibility than other types of credit. They don't come with fixed monthly payments or pay-off dates like loans, though you will have minimum monthly payments. While you can repay your entire balance at once, you don't have to. However, keep in mind that if you choose not to, you'll be charged interest.
Types of revolving credit
Revolving credit comes in two types: unsecured and secured credit.
Secured credit is credit backed by collateral, such as a security deposit or property like a car or a house. Your borrowing limit in secured revolving credit is proportional to whatever you put up for collateral.This is less of a risk for lenders since they will be compensated if you can't pay back your debts. Because there's less risk, your interest rate under secured credit will typically be lower.
A common example of secured revolving credit is a secured credit card, which lets you borrow from a security deposit you place when opening the card. A home equity line of credit (HELOC) is another form of secured credit that uses your home value as collateral.
On the other hand, unsecured revolving credit isn't backed by anything. While you as a borrower won't be at risk of losing anything if you don't pay your debts, your interest rates will be higher. Most traditional credit cards are forms of unsecured revolving credit.
Pros and cons of revolving credit
Just like all financial products, revolving credit accounts come with their benefits and drawbacks.
Pros of revolving credit
- The ability to spend what you need:If you have a credit card with a $10,000 credit limit, you don't have to spend that entire $10,000 if you don't want to. You can spend as little or as much as you need.
- Control how you repay your account: You can choose to pay off your account in full every month, or you can pay only the minimum balance or any amount in between (though you'll pay interest on your balance).
- A long-lasting source of credit:With a credit card or another revolving credit account, you won't have to apply for a new amount every time you need money like you would with a loan.
- Spending rewards and benefits: Credit cards often offer benefits when you spend using a credit card such as cash back on purchases. You may even qualify for some perks just by holding a certain credit card. You can find our guide on the best rewards credit cards here.
Cons of revolving credit
- Higher interest rates:Revolving credit accounts typically come with higher interest rates than loans. Interest can become very problematic if you don't pay your account in full every month.
- Fees:Some revolving credit accounts require you to pay annual fees, origination fees, or other fees.
- Debt and a damaged credit score:If you don't repay your accounts on time and in full and spend more than you can afford, you could end up in debt with a damaged credit score.
How does revolving credit affect your credit score?
When calculating your credit scoring from your credit report, both FICO and VantageScore, the two most popular credit scoring models, factor types of credit into your overall score. Your mix of credit accounts makes up 10% of your FICO score while VantageScore groups types of credit and length of credit under one category, making up 21% of scores.
What this means is that lenders like to see that you can keep multiple types of credit in check, similar to how colleges like students who can balance academics and a sport or other extracurriculars. For example, you may have student loans and an auto loan that you're already on top of. If you can add a credit card to this mix and pay it off regularly, that may improve your credit score. In a lender's eyes, you become a safer bet when they let you borrow money.
Revolving credit also comes into play when you look at credit utilization ratio, which makes up 30% of FICO scores and 21% of VantageScore calculations. Credit utilization is the ratio of the credit you are currently using to your total available credit. This should stay under 30%, though the lower you can get your utilization ratio, the better.
The latest models of both VantageScore and FICO, 4.0 and 10T respectively, account for trended credit data. Trended data is a method of predicting future behavior by looking at past data. In the case of credit, this means looking at balances on your revolving credit accounts for the past 24 months to predict how you'll make future payments.
How to use revolving credit
Revolving credit can be a useful financial tool to build your credit history, if you use it properly. To avoid getting into trouble with revolving credit, follow these tips.
Control your spending
If you have access to a large credit limit, it can be tempting to live life to the fullest and spend more than you can afford — but avoid that impulse. Failing to pay your minimum debt for over 30 days can result in a delinquency on your credit report, lowering your credit score and raising your interest rates.
Use revolving credit responsibly by only charging what you can pay in full every month. That allows you to take advantage of rewards and points on credit cards and improve your credit score without going into debt.
Pay more than your minimum payments
Getting into the habit of only making minimum payments can lead to a cycle of debt, since you'll have to pay a great deal of money in interest. To pay off debt, make an effort to pay your balance off in full every month. If you can't afford to pay the full balance, paying more than the minimum can at least help you save on interest.
Depending on how you use it, revolving credit can be your best friend or your worst enemy. To stay out of debt and keep your credit score in tip-top shape, be extra careful any time you use a credit card, retail card, line of credit, or another form of revolving credit.
Ask for a credit limit increase
You can ask your credit card company for a higher credit limit every six months or so. Your chances of getting approved for an increase improve if you've received an income boost since your last credit limit increase. That said, make sure to read all the terms before making a request. Your credit card company might pull a hard inquiry on your credit report, resulting in a drop in your credit score.
While you can spend more with a higher credit limit, the real benefit of a credit limit increase is in your utilization ratio. Each dollar you spend will have a smaller effect on your credit utilization ratio, allowing you to spend more without hurting your credit score.
On the other hand, credit limit increases can tempt cardholders to spend more, potentially leading to unmanageable amounts of debt.
Revolving credit frequently asked questions
Do revolving credit accounts hurt your credit score?
Revolving credit accounts can affect your credit score for better or worse depending on how well you manage debt. That said, credit card delinquencies are currently rising, reaching 2.98% in the third quarter of 2023.
What is a good amount of revolving credit to have?
The higher your credit limit is, the better. That said, you'll want to keep your balances on revolving credit lines under 30% of your credit limit.
What is the difference between revolving credit and a line of credit?
A line of credit is a type of revolving credit. Lines of credit usually expire after a certain time while other revolving credit, like credit cards, can be used indefinitely as long as your account is in good standing.
Freelance Writer
Anna Baluch is a freelance writer from sunny Cleveland, Ohio. She enjoys writing about mortgages, debt relief, retirement, and more. Connect with her onLinkedIn.
Associate Editor at Personal Finance Insider
Paul Kim is an associate editor at Personal Finance Insider. He edits and writes about credit scores, debt, and identity theft.When he's not writing, Paul loves cooking and eating. He hates cilantro.
