what is revolving debt

Revolving debt is money a borrower owes after using a revolving credit account. The most common form of revolving debt is a credit card. About 77% of American adults have at least one credit card, although the average consumer has 3 cards.1 

To learn more about revolving debt, such as credit cards and lines of credit, and how they affect your credit score, keep reading!

What Is a Revolving Credit Account?

How does revolving credit work? Revolving credit accounts allow people to borrow money continuously until they have reached a predetermined amount. There are many different products available when it comes to revolving credit, which means people of all kinds of credit history may qualify for one product or another. 

Lenders may request access to past credit reports to determine the details of a credit account, such as the maximum funding limit, interest rate, and payback terms. These reports will give the lender an idea of the potential financial risk they take by extending lines of credit to an individual. 

What Is a Credit Limit?

Your limit is the total funds you can utilize on your revolving credit account. The average American has $22,751 available credit across multiple credit cards.2 

While setting up your line of credit, you and your creditor will agree upon a maximum amount of money you’ll have access to. Then, your overall credit will decrease as you use your available credit. Once you have paid back what you borrowed, your credit will reset to the original agreed-upon amount. 

A credit card issuer or financial institution extending personal lines of credit will look at a borrower’s credit score, credit history, and other financial factors to determine their limit. 

Common Examples of a Revolving Credit Line

Two of the most popular forms of revolving credit accounts are credit cards and home equity lines of credit (HELOC). 

  • Credit Cards — Credit card borrowers have access to a credit limit. Credit card debt is considered a revolving debt. While borrowers have renewed access to their credit limit at the beginning of every billing cycle, their available balance remains the same and grows as they continue to make purchases. 
  • HELOC — A home equity line of credit (HELOC) is funding secured by the monetary value of the borrower’s home or property. Like a mortgage loan, a home equity line of credit is funding based on the value of a piece of property. This line of credit is risky because the creditor can repossess the property if the borrower defaults. 

How To Get Out of Revolving Debt

There are several ways to get out of revolving debt. How you go about taking care of your revolving account balances can significantly impact your credit score. Check out the helpful tips below to earn the most positive credit report marks. 

Consolidate Your Debt Instead of Settling 

When it comes to debt consolidation vs debt settlement, which is better? 

  • Debt consolidation — Borrowers with multiple forms of debt can combine them into one loan. That way, you are making one minimum monthly payment instead of several. 
  • Debt settlement — If a borrower cannot repay the debt, they can talk to the creditor to forgive the debt. Credit bureaus consider debt settlement a red flag and may not extend loan approval. 

To keep your credit score intact, you would always want to choose to consolidate your debt over debt settlement. 

Come Up With a Debt Repayment Plan

Keeping your finances organized will help make your debt repayment less stressful. Try putting together a debt repayment plan you can stick to. The debt snowball or avalanche method have proven extremely helpful for many debtors. 

Pay More Than Your Minimum Payment Due

To pay off debt faster, try paying more than the minimum due each month. You may have lower interest charges when you pay more towards your balance. 

Differences Between Revolving Credit and Installment Loans

There are several key differences between revolving credit and installment credit that all borrowers should be aware of. Once you understand the difference between installment loans and revolving credit, you can decide which funding product is better for you.

FeatureRevolving CreditInstallment Loans
Type of DebtOpen-endedClosed-ended
Credit LimitPredetermined limitLump-sum amount
Usage of FundsContinuous borrowing up to the limitOne-time disbursement
Interest RateVariableUsually fixed, sometimes variable
Repayment TermsFlexible, minimum payment requiredFixed monthly payments
Common ExamplesCredit cards, HELOCMortgages, car loans, student loans
Effect on Credit ScoreCan affect the credit utilization ratioLess impact on credit utilization
Payment History ImpactYesYes
Debt Consolidation OptionPossiblePossible
Risk to AssetGenerally unsecuredOften secured (e.g., home, car)
Access to Additional FundsYes, up to the credit limitNo, unless you refinance

What Are Some Different Types of Installment Debt?

Borrowers may take advantage of several types of installment debt, also referred to as non-revolving credit. Below are a few examples.  

  • Mortgage Loans — A mortgage loan is funding to purchase a real estate property. Mortgages usually come with a variable interest rate, which means rates will cause monthly payments to fluctuate. 
  • Auto Loans — Car loans are available for borrowers looking to pay for new or used vehicles. With auto loans, the equity in the vehicle is what secures the funding. So, if borrowers fail to repay their auto loan, they risk losing their car. 
  • Personal Loans — Personal loans are installment loans that allow borrowers to purchase almost anything. Borrowers can use a personal loan to pay for medical bills, refinancing, funeral costs, and other unexpected expenses.   

How Does Revolving Debt Affect My Credit Score Compared to Installment Debt? 

Both revolving credit and installment debt can affect credit scores. If you want better loan deals, keeping your credit as clean as possible is best. All borrowers want to avoid the negative effects of having a bad credit score

According to the current credit scoring models, five main factors contribute to your credit score on your report. Below are all five factors of how revolving credit and installment credit may affect each one. 

Credit Mix

Your credit mix refers to the variety of financial accounts you currently have. Installment loans affect the credit mix because they let creditors know that you have taken out a loan and owe money. Revolving credit accounts affect the credit mix because it lets financial institutions know that you have access to a set amount of money and how often you borrow from that set amount. 

Payment History 

Since installment loans and revolving credit come with a repayment schedule, financial institutions look at how faithful borrowers are to that plan. When you make your revolving debt or installment debt payments on time, these actions reflect positively on your credit report. 

Amounts Owed

How much money you owe compared to the cash flow you bring in regularly also contributes to your credit score. This is called your debt-to-income ratio

Your debt also affects your credit utilization ratio. A credit utilization ratio is how much available credit a borrower has compared to how much they are currently using. For example, say a person has two credit cards with a $1,000 limit. If the balance on one credit card is $1,000 and the other is $0, then that person’s credit utilization ratio would be 50%. 

Credit History Length

How long you have had financial accounts open factors into your credit score. Say your credit card is your oldest financial account you should reconsider before closing, as long as you can keep up with your monthly payments. However, if an installment loan is your oldest account, you should not hesitate to repay it. Paying off your debt is more important than keeping your installment loan account open. 

New Credit Inquiries 

How often you apply for new credit accounts is another factor that contributes to your credit score. While revolving credit does not require borrowers to reapply every time they use funding, an installment loan might. 

FAQs About Using Revolving Credit Responsibly

How does revolving credit impact my credit scores compared to installment credit?

While revolving and installment credit can affect your credit scores, revolving credit often has a more immediate impact due to the credit utilization ratio. This ratio measures how much of your available credit you’re using, and it’s a significant factor in your credit scores.

Can I increase my maximum credit limit on a revolving credit account?

Yes, many financial institutions allow you to request a credit increase. However, this might involve a hard inquiry into your credit report, which could temporarily lower your credit scores.

What happens if I exceed my maximum credit limit on my credit card?

Exceeding your maximum limit can result in over-limit fees, higher variable interest rates, and a negative impact on your credit scores. Keeping track of your spending is essential to avoid exceeding the limit.

How does available credit work in a revolving credit account?

Your available credit is the amount you can still borrow from your limit. As you pay off your balance, your available credit increases, allowing you to borrow money again up to your limit.

How do variable interest rates affect my revolving credit balance?

Variable interest rates can fluctuate over time, affecting the amount you owe. If the rate increases, you’ll end up paying more in interest, which could make it more challenging to pay off your balance.

What CreditNinja Wants You To Know About Revolving Debt

Installment credit and revolving credit are different forms of emergency cash. Most American consumers use both, but remember that interest charges are typically higher with revolving debts, although the repayment schedule is usually more flexible. 

CreditNinja offers online loans with competitive rates and flexible repayment plans. You could get money quickly and pay it back in monthly installments. Complete the simple online form today to see how much you may qualify to get with a personal loan!

And if you want more information on revolving debt, such as what happens if you falsely dispute a credit card charge, or installment vs revolving loans fully explained, check out our online blog!  

References:

  1. How many credit cards should I have? │ New York Post
  2. What is an average credit card limit? │ CNBC
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