Imagine having to apply for a new credit card every time you want to buy something. It would get frustrating fast, and you’d probably stop using your credit card for everyday purchases. To avoid this inconvenience, creditors offer revolving credit accounts that let you use the same credit line to continually borrow money.
The creditors limit their risk by setting a maximum amount you can borrow—your credit limit—and they monitor your account and creditworthiness to determine if they should raise or lower your limit. But once your account is open, you can repeatedly borrow against it without having to reapply.
What is revolving credit?
A revolving credit account allows someone to borrow by using a credit line with a maximum credit limit. Borrowers can open a revolving credit account and choose when to take out loans against their credit line until their balance reaches their credit limit. When repaying the debt, borrowers can pay it off all at once, or they can pay a portion and revolve the remaining balance into the next billing period.
Examples of revolving credit accounts
You can open and use different financial products that will give you access to a revolving line of credit. Common examples include:
- Unsecured and secured credit cards
- Unsecured personal and business lines of credit
- Secured lines of credit
Each account will have a credit limit and let you revolve your balance, but they also work differently.
Unsecured and secured credit cards
Credit cards are one of the most popular ways to obtain a revolving credit line. You can use a credit card to make a purchase, balance transfer, or cash advance against your card’s credit limit.
Each month, you have to make a minimum payment to avoid late fees and hurting your credit score, a grade that lenders check to determine if you are likely to pay your bills when they’re due. However, if you pay your balance in full, you don’t pay interest on your purchases.
Many credit cards are unsecured credit lines, and you qualify based solely on your creditworthiness, which is measured by various factors, including your income, debts, and credit score. But if you have a low credit score, you may want to apply for a secured credit card instead. These work almost identically, but you need to send the card issuer a refundable security deposit to open your account. The deposit helps limit the issuer’s risk and determines your card’s credit limit.
Unsecured personal and business lines of credit
With an unsecured personal line of credit or business line of credit, your eligibility, rates, terms, and credit limit can depend on your personal or business credit scores and the lender.
Similar to a credit card, you’ll have a maximum credit limit. However, unlike with a credit card, interest accrues on a line of credit as soon as you take a draw—a loan against the credit line. There may also be minimum draw requirements and monthly or annual maintenance fees to keep your account open.
With some credit lines, each loan you take out has its own repayment amount and a fixed repayment period. You can take out additional loans as you pay down your balance and free up available credit.
Other lines of credit have an initial draw period, which is when you can take draws and make minimum or interest-only payments. Your account revolves during the draw period. Once it ends, you can’t take any additional draws, and you make fixed payments during a repayment period.
Secured lines of credit
There are also secured lines of credit, which require you to offer the lender collateral to open your account. A home equity line of credit (HELOC) is a popular option, but you can use other assets as collateral as well. For example, business owners may use their business’s assets to open a business equity line of credit.
These secured lines of credit can be easier to qualify for and may offer lower interest rates than unsecured credit lines, but you could lose the collateral if you don’t repay your loan. Also, your eligibility and credit limit can depend on the collateral’s value.
Revolving loans vs. installment loans
Installment accounts are another popular type of credit account, and these include personal, student, auto, and home loans. These accounts share some similarities, but there are also big differences.
Receiving the funds
- How they’re different: Installment loans give you the entire loan amount upfront, and you’ll need to apply for a new loan if you want to borrow more money. Revolving accounts have a maximum credit limit, but you can choose when and how much you want to borrow.
- How they’re similar: Revolving and installment loans generally charge you interest on the amount you borrow. The rate can depend on the type of loan, lender, your creditworthiness, and (in the case of secured loans) your collateral.
- How they’re different: You pay interest on the entire installment loan from the start because the lender gives you the funds right away. With revolving accounts, you only pay interest on the amounts you borrow. Credit cards also let you avoid interest on purchases by paying off your balance in full each month.
Repaying the loan
- How they’re similar: You’re required to repay the loan plus fees and interest. If you fall behind, creditors may charge you an additional fee and report late payments to the credit bureaus—Equifax, Experian, and TransUnion. The late payments may then appear in your credit reports and hurt your credit scores.
- How they’re different: Installment loans require regular payments over a predetermined period. Revolving accounts don’t have a set repayment period and let you make minimum payments while revolving part of your balance. But your minimum payment could increase if you take out new loans against your revolving credit account.
Using the funds
- How they’re similar: You can use either type of account to borrow money. There are also secured and unsecured options for both revolving and installment accounts.
- How they’re different: Revolving accounts, including secured lines of credit, often don’t require you to use the funds for a specific purchase. That’s true of unsecured installment loans as well. However, many secured installment loans (e.g., auto loans and mortgages) are only available for a specific type of purchase.
Impact to your credit score
- How they’re similar: Both types of accounts can be reported to the credit bureaus and affect your credit scores. Making at least your minimum payments on time can help your credit scores, while late payments can hurt your scores. Having a mix of both types of accounts in your credit report can also be good for your scores.
- How they’re different: The current balance relative to the initial loan amount or credit limit is a factor in credit scores, but credit scores tend to give more weight to how you’re using revolving accounts. Your credit utilization ratio (current balance divided by credit limit) can be a major factor in your score, and a lower ratio is better.
Revolving credit FAQ
What is a revolving line of credit?
A revolving line of credit is a credit account that gives you the option of borrowing up to your credit limit. You can free up available credit by paying down your balance, allowing you to repeatedly borrow against the same credit line without reapplying for a new loan.
What are the disadvantages of revolving credit?
A revolving credit account isn’t the right fit for every situation, especially because these accounts often have variable interest rates. For example, you may be better off with a fixed-rate loan to buy a vehicle because you may be able to save money by locking in a lower interest rate.
What is an example of a revolving line of credit?
Common examples of revolving lines of credit include unsecured credit cards and personal lines of credit. Secured credit lines, such as a home equity line of credit (HELOC), are also popular.
What is the difference between a line of credit and revolving credit?
There are revolving and non-revolving lines of credit. A non-revolving credit account has a credit limit and lets you take multiple draws, but the credit limit is the maximum you can borrow overall rather than the maximum you can borrow at one time.