When it comes to credit, there are three types that you’re likely to encounter: open-end credit, installment credit and revolving credit. Read ahead to find out exactly what revolving credit is and how you can handle it properly.
What Is Revolving Credit?
Revolving credit is a credit account that gives you a predetermined credit limit — this is the maximum amount that you can borrow from the account. When you decide to borrow credit within your limit, the repayment cycle begins. During this monthly cycle, you will have the option to pay down the outstanding balance in full or only pay a portion of it. If you only pay a portion of the balance, the remainder will carry over into the next month. The balance will “revolve” until it’s completely paid down.
Credit cards are popular forms of revolving credit. Research from the 2019 Experian Consumer Credit Review stated that the average American had 4 credit cards. So, you’re bound to have at least one card sitting in your wallet.
Home equity lines of credit (HELOCs) are another common form of revolving credit. These revolving credit accounts are only available to homeowners who can afford to secure the account through the home equity they have built. If you haven’t built a lot of equity, or if you’re not a homeowner at all, this option will be unavailable to you.
This doesn’t mean that you can’t access a line of credit! There are personal lines of credit that aren’t connected to home equity. This type of revolving credit is ideal for emergency expenses, like when your car needs urgent repairs or when you need plumbing services in the middle of the night. You can withdraw funds from your personal line of credit and use them to manage an expense in a short amount of time.
How can you get a personal line of credit? If you don’t have one already, there are online personal loans in the form of lines of credit. As long as you meet all of the qualifications for the personal loans, you can send in an application.
How Can You Handle Your Revolving Credit?
Remember Your Payments
Whenever you use credit from your revolving credit accounts, you will need to eventually make repayments. Do not miss these monthly payments.
Missing monthly payments will result in late fees, higher outstanding balances and potential interest rate hikes. Missed bill payments will also be added to your credit report and damage your consumer credit score.
Pay More than the Minimum
Revolving credit accounts will sometimes offer a “minimum payment” for users. The minimum payment is the smallest amount that you can put toward your balance to have your monthly bill reported as “paid.” Paying the minimum is not a great habit to keep up with. It will not help you tackle a large balance, especially when you consider compounding interest.
Keep Your Utilization Ratio Down
Your credit utilization ratio is the ratio between your used credit versus your available credit. Ideally, your ratio should be below the halfway point.
Why is that? A high credit utilization ratio will be more challenging to manage on your own. Naturally, a higher balance will require higher payments. If you can’t afford to make these higher payments, your balance will accumulate more interest and continue to grow. This can increase your risk of missing a payment — or worse, maxing out your account.
A higher ratio puts you at a higher risk of defaulting on payments, which can lower your credit score. On the other hand, a lower ratio can raise your credit score over time.
Don’t let your revolving credit get out of control. Follow these tips!
