What is revolving credit?

Revolving credit is a type of loan that gives you access to a set amount of money.

You can access money until you’ve borrowed up to the maximum amount, also known as your credit limit. As you repay the outstanding balance, plus any interest, you unlock the ability to borrow against the account again.

With revolving credit, you can make a minimum payment and carry — or “revolve” — the rest of your debt from one month or billing period to the next. When you carry a balance on a revolving account, you’ll likely have to pay interest.

Three types of revolving credit accounts you might recognize:

• Credit cards
• Personal lines of credit
• Home equity lines of credit (or HELOC)

Having access to revolving credit could help you manage your monthly finances and cover unexpected emergencies, but there are a few things to watch out for, including fees and interest. Keep reading to learn more.

• How does revolving credit work?
• Revolving vs. nonrevolving credit: How are they different?
• How can revolving accounts impact your credit?
• Tips for using revolving credit

How does revolving credit work?

Here are some key things to know about how revolving credit accounts work.

Drawing money

Depending on the type of credit account you have, how and when you draw money from your revolving credit account can differ. There are different possible ways to draw money from an account’s credit line, like a transfer to your checking account or a purchase.

Once your account’s balance reaches the credit limit, you’ll need to pay down the balance before you can borrow against the credit line again. So you’ll want to pay attention to how much you’re charging to the card.

The account balance is the total amount you’ve borrowed, which can include a number of charges, such as …

• Purchases
• Balance transfers
• Fees
• Interest charges

Even if you already have a balance, you can keep borrowing until your balance reaches your credit limit, then repay the amount you borrowed (plus any interest you owe) and borrow again.

Making payments

Your account balance is reduced by any payments you make to the account.

Generally, you only need to make at least a minimum payment each month. But repaying more can save you money, as you’ll likely be charged interest on the money you borrow. If you can’t pay your entire bill on time each month, the rest of the balance typically carries over to the next billing cycle. You build up interest charges on the portion of your balance that isn’t paid on time.

The interest rate you’ll be charged will depend on a number of factors, like your credit history, the type of account you have and the type of transaction you’re making.

Fees to watch out for

Be aware that accounts typically charge fees. For example …

• Credit cards often charge a number of fees, like an annual fee and transaction-related fees (e.g., foreign transaction fee, cash advance fee)
• Lines of credit can also charge fees, like an annual fee or origination fees
• A HELOC can come with a host of fees on top of an annual fee (e.g., closing costs)

Revolving vs. nonrevolving credit: How are they different?

With a nonrevolving installment loan, you borrow a fixed amount of money up front and then repay it with interest in installments over a specific period of time.

Once you pay off the loan in full, the account is closed and you’ll have to apply for a new loan if you need to borrow more money.

Examples of nonrevolving installment loans include auto loans and student loans.

How can revolving accounts impact your credit?

There are a few ways a revolving credit account can impact your credit.

• When you apply for the account, the creditor will likely review your credit history, typically resulting in a hard inquiry (which could lower your credit scores by a few points or have a negligible effect on them).
• Opening a new account may also lower your average age of accounts, which might lower your scores.
• You could also be adding to your mix of credit, which may improve your credit health.

But the biggest impact on your credit could come from how you use the account.

• If you make at least the minimum required payments on time, you can build a history of on-time payments, which can be a very important factor for your credit scores and overall credit health. Missing payments can negatively affect your credit.
• Another important factor is how much of your credit limit you’re currently using. A lower utilization rate (your total current balances divided by the total of your credit limits) may be beneficial for your credit. For credit cards, most experts recommend keeping your credit utilization below 30%.

Tips for using revolving credit

Revolving credit can be a helpful financial tool. But these types of credit accounts can also have high interest rates. You may need to be careful about when and how you use revolving credit.

Here are a few tips.

Manage your cash flow

Revolving accounts could help you manage dips in your income and any unforeseen expenses. If you’re using revolving credit for these reasons, try to borrow only what you need to get through the rough patches and repay it once your income or expenses level out.

Plan ahead if you expect to need a series of loans

In some cases, you might be able to accomplish your goals best with a revolving credit line.

For example, if you’re remodeling part of your home, you might be deciding between a home equity loan or a HELOC. With a home equity loan, you’d have to take out the full amount and start paying back the loan with interest right away.

But a HELOC might make more sense if you expect the remodel to be a long-term project or you’re not exactly sure how much it will cost. By using a HELOC, you can withdraw the amount you need to borrow, which could help limit how much interest you’ll pay. You might also get approved for a larger credit limit than you expect to need, which could come in handy if there are unplanned expenses.

Control your spending

Having access to a large credit limit may be too tempting. Revolving credit accounts can have high interest rates, and you may be able to borrow more than you can afford to repay. If you don’t plan well, you may wind up with high-interest debt that can be difficult to pay off. Make sure to monitor your spending and hatch a plan to pay off what you borrow, on time and in full.

Pay more than the minimum

Your minimum payment could be much lower than your account’s balance. If you only pay the minimum, it could take you a long time to pay off the account, and you can end up paying a lot of interest.

When you use a credit card, you can often avoid paying interest on purchases by repaying your balance on time and in full each month. And even if you can’t afford to pay the full balance, paying more than the minimum could save you money in the long term.

Bottom line

You may benefit from using a revolving account to borrow money or even to get rewarded for your normal monthly purchases. But you should keep an eye on the terms, like the credit limit and interest rate, before you open a revolving credit account.