Here’s what you need to know about credit card debt settlement.
What is a revolver?
If you have a credit card, and you always carry a balance on that card, you’re a revolver. Revolvers often pay only the minimum payment required each month. Revolvers seldom repay fully each month the amount they borrow on their cards, and the interest they pay on their balances is a huge source of income for credit card companies.
The term revolver derives from “revolving credit,” which describes the way of borrowing on credit cards. When a consumer takes out a credit card, the issuer agrees on a maximum credit limit. The consumer is free to borrow up to that amount at any time, and after repaying the amount, the consumer is free to borrow it again, so the available credit is always revolving.
The opposite of a revolver is a “transactor,” one who pays the full balance on their credit card each month. Because transactors pay off the full balance of their credit cards each month and never accumulate debt, they are considered a low credit risk. But they aren’t the best customers for a credit card company because by paying off balances, they avoid interest charges on their credit cards.
Customers who always pay off their card balances never pay late payment fines or interest, and such activity usually indicates they are a low credit risk. However, the national credit bureaus that generate credit scores don’t usually see a difference between transactors and revolvers. The bureaus consider whether payments were made on time, and not whether they were for the full amount borrowed or just the minimum amount. In other words, paying a credit card balance in full doesn’t improve a consumer’s credit score.
However, the way a customer uses a credit card may affect his or her eligibility for a loan because of changes in underwriting policies that Fannie Mae introduced in 2016. The new policies evaluate how loan applicants have managed their credit over the previous two years, including how much they paid each month. Using this “trended credit data” gives a better indication of how consumers use their credit, and whether they are a high credit risk. The new process benefits transactors, helping to ensure that creditworthy borrowers have access to mortgage credit.
Example of a credit card revolver
Being a revolver, paying the minimum amount due on your credit cards each month, isn’t necessarily going to harm your credit report or credit score, as long as you continue to make payments on time. But changing the way you use credit may increase your chances of getting a mortgage and improve your financial situation. Paying off revolving credit on your cards every month minimizes the risk of late fees that harm your credit score, and also reduces the amount of interest you pay on credit card balances.