What is revolving credit and how does it work?
Revolving credit is a line of credit that lets you borrow up to a certain amount of money, pay down the balance and then borrow again when you need to. Credit cards, personal lines of credit (PLOCs) and home equity lines of credit (HELOCs) are common types of revolving credit.
Learn about how revolving credit works, what a revolving balance is and tips to help you stay in control of your finances.
What you’ll learn:
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Credit cards, PLOCs and HELOCs are examples of revolving credit.
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When you borrow from a revolving account, the amount of available credit goes down. It goes back up when you repay it.
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Revolving credit accounts generally stay open as long as the account is in good standing.
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Revolving credit is different from installment credit. Mortgages and auto loans are examples of installment credit accounts.
What is revolving credit?
Revolving credit refers to debt that can be used and then paid down repeatedly as long as the account remains open and in good standing. It’s also known as open-ended credit. Revolving credit, such as credit cards, can offer a convenient way to pay in person or online.
How to keep a revolving credit account in good standing
A balance can be paid back all at once or in increments, but consistently making at least the minimum payment on time is a large part of keeping an account in good standing and avoiding late fees. When it comes to credit cards, if you’re able to pay off your entire statement balance each month, you can typically avoid paying interest on new purchases too.
Learning more about the relationship between statement balances, current balances and minimum payments can help you decide how to best manage your account.
How does revolving credit work?
Revolving credit accounts typically come with a preset credit limit. This is the maximum amount account holders are allowed to charge to the account. And the amount of available credit decreases with purchases made.
What is a revolving credit limit?
A revolving credit limit is typically the maximum an account holder can borrow. If your credit card has a limit of $5,000 and in one month you charged a total of $800, your total available credit goes down to $4,200. But when you make a payment, your available credit typically goes back up by a corresponding amount.
Revolving credit examples
Credit cards are a common type of revolving credit. But they’re not the only type. Others include:
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PLOCs: A PLOC is similar to a credit card, but it’s not linked to a physical card. Instead, you receive funds you can repeatedly borrow and pay back up to a certain limit.
- HELOCs: A HELOC lets you borrow money against the value of your home. You can borrow and repay the money multiple times against a preset credit limit. This is different from a home equity loan (HEL), which is a lump sum of money you borrow once with a fixed interest rate.
How does revolving credit hurt or help credit scores?
Like other types of credit accounts, the way a revolving account impacts your credit scores depends on how you manage your account. Here’s a list of some factors used to calculate credit scores:
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Payment history
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Debt
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Credit age
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Credit mix
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New credit applications
Installment loans vs. revolving credit
Auto loans, mortgages and student loans are examples of installment loans. They’re also referred to as nonrevolving or closed-ended accounts.
Here are some ways installment loans are different from revolving credit:
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Available credit: With closed-ended installment loans, you borrow the amount once. The account is closed once your balance is paid off.
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Payments: Installment loan accounts are generally repaid in regular equal payments—also known as installments—over a specific period of time. And in some cases, there might be a prepayment penalty for paying off the loan ahead of schedule.
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Interest rates: Installment loans may have lower interest rates than revolving credit accounts if they’re backed by collateral. But keep in mind that it might be possible to avoid interest charges on revolving credit if the balance is paid off every month.
- Flexibility: Many installment loans are only approved for a specific purpose, such as a car loan or mortgage.
Revolving credit FAQ
Here are some common questions about revolving credit.
Is revolving credit good or bad?
Any debt could be good or bad, depending on how it’s managed. But revolving credit can be helpful, especially when you have unexpected expenses.
Some revolving credit accounts may also offer cash back or other rewards. And like other types of credit, consistently using revolving credit responsibly could have a positive impact on your credit scores.
What is a good amount of revolving credit?
Part of your credit scores depend on how much credit you have versus how much you’ve used. This is known as your credit utilization ratio. While everyone’s situation is different, the Consumer Financial Protection Bureau (CFPB) recommends using no more than 30% of your available credit.
When should you use revolving credit?
Revolving credit can be a flexible way to make purchases and repay them over time. In contrast, installment credit accounts are typically reserved for larger expenses, like buying a car or home. Ultimately, when to use revolving credit is up to you.
Should I pay off my revolving credit balance?
Revolving credit can be used and paid down repeatedly. But the CFPB recommends paying off your entire balance whenever possible, especially because missed payments can result in fees and impact your credit scores.
Key takeaways: Revolving credit
Using revolving credit can make it easy to access funds when you need them, up to your credit limit. And when you consistently manage your revolving credit accounts responsibly, you might even be able to improve your credit scores.
Thinking of opening a revolving credit account? Compare credit cards from Capital One and find which card is right for you. And you can see whether you’re pre-approved, with no harm to your credit scores.
