REVOLVING CREDIT IS A credit line you can borrow against and repay over and over again. It can be a flexible way to borrow, but it’s not ideal for every purchase. Learn how revolving credit works and whether it’s a good choice for your financial plans.
What Is Revolving Credit?
Revolving credit means you’re borrowing against a line of credit. Let’s say a lender extends a certain amount of credit to you, against which you can borrow repeatedly. The amount of credit you’re allowed to use each month is your credit line, or credit limit. You’re free to use as much or as little of that credit line as you wish on any purchase you could make with cash.
At the end of each statement period, you receive a bill for the balance. If you don’t pay it off in full, you carry the balance, or revolve it, over to the next month and pay interest on any remaining balance. As you pay down the balance, more of your credit line becomes available.
“A classic example of revolving credit is a credit card,” explains G. Brian Davis, personal finance columnist and co-founder of Spark Rental, an educational site for real estate investors. “The balance goes up and down as the consumer either pays it down or charges it up. The monthly payment fluctuates alongside the balance.”
That’s different from when you need to borrow money for a specific purpose – to buy a car or to cover college tuition, for example. For that, you’d typically take out an installment loan, essentially borrowing one big chunk of money and paying it off in monthly installments until the debt is gone….Read more>>