What is revolving credit?
Revolving credit is a financial arrangement made between the borrower and a lending institution in which the borrower is extended a set amount of money to use at their discretion. Once the borrower repays all or part of the money, he can borrow it again without going through a new credit check.
Whether or not you need collateral to secure revolving credit depends on the type of credit applied for. When you apply for a HELOC, your home serves as your collateral. Your lender knows it has an asset it can put a lien on in the event you stop making payments on the loan. Credit cards, including those for specific department stores and gasoline, offer revolving credit with no collateral and no actual way of recouping losses if you stop making payments.
Lenders take a close look at anyone who applies for revolving credit. There are a number of factors lenders consider to determine whether to extend you credit, including your FICO credit score, your debt-to-income ratio and whether you have had the same job and residence for a long time.
The greatest disadvantage associated with revolving credit may be the temptation to spend more than you can afford. Knowing that you have a credit limit just sitting there, waiting to be used, can be enticing when friends ask you to join them on a vacation or when you are at a home show and see a hot tub that would look great in your back yard.
Revolving credit example
It is likely that you have one or more types of revolving credit, including:
Whether it is secured or unsecured, there are a number of ways revolving credit can work in your favor. Revolving credit can offer financial flexibility. Say you use a typical, close-end loan to purchase $10,000 of new carpeting for your home. Once you have paid off that balance, the funds are no longer available to you.
With revolving credit, you would be able to borrow it again for anything you need without going through the approval process. This can come in handy when the water heater goes out or there is an unexpected medical bill. The trick, of course, is to handle the debt wisely. Borrow only what you can afford to repay and use credit only for items you truly need.
Use our calculator to figure out how long it will take to pay off your credit card debt.