Revolving credit is when you are free to access credit from a specific lender. You are able to withdraw funds and repay them when you feel necessary. Once the funds have been repaid, you have free access to use the money in any situation you see fit.
A great benefit of having a revolving line of credit is that your lender will report all positive payments to the 3 major credit bureaus: Experian, Equifax, and TransUnion. A revolving line of credit is a great way to build up your credit score.
Just as with any type of credit or loan, you must be a responsible borrower. If you become delinquent on your account or are only making partial payments each month, negative entries will show up on your credit report and thus lower your credit score.
Believe it or not, the most common type of revolving credit can be found in your wallet: a credit card! The card issuer will provide you with a “Credit limit” that you can spend on a monthly basis. As you know, you will be required to repay the amount you borrowed with some interest.
However, you can make a payment anytime you desire. You can pay your statement every single day or just once per month like most consumers.
Another common example is a HELOC, also referred to as a Home Equity Line of Credit. If you have a large enough stake in your home, you can borrow money against that equity stake. You can take the money from your HELOC as you please and repay it.
What’s great about revolving credit is that you do not need to pay interest on any excess funds you borrow. You simply take out what you need and pay interest on that amount. Its good to know that HELOC rates are usually much lower than credit card rates due to them being a secured line of credit.
How is Revolving Credit Different Than a Loan?
With revolving credit, you simply repay what you borrow with interest at your own rate. When it comes to a loan, you will have a fixed payment amount due at the end of each month. The interest rates are predetermined and you cannot simply “not use” the funds you borrowed. Revolving credit typically also carries a variable interest rate while loans are fixed.
All in all, a revolving line of credit is a great way to get the money you need. You can repay at your own pace and only pay interest on what you borrow.
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