Whether your apartment requires a quick renovation or you are in need of a medical emergency, revolving credit can just be the helping hand you need! It will allow you to borrow money up to a set limit and then pay it back over a span of time. Isn’t that the perfect financial cushion you need in a financial emergency? Continue reading to find out everything you need to know!
Here’s How Revolving Credit Works
When you are using a revolving credit account, it will set a credit limit for the maximum amount you can spend through the account. Now, when you need to pay off the balance, either you can choose to do so in full at the end of each billing cycle or you can opt to revolve the balance.
How does that work? It is simple! Revolving balance means you will have to make a minimum payment each month. This can either be a fixed amount or in some cases, percentage of your total balance. This decision is made depending on which amount is higher. For the rest of details, we suggest you always thoroughly read out the fine prints of revolving credit agreement. This will highlight any other fee you might have to pay such as the interest on balance being carried from one month to the next, annual fee or fee for late payments.
In A Nutshell
“Revolving credit allows customers the flexibility to access money up to a predetermined limit, known as the credit limit. When the customer pays down an open balance on the revolving credit, that money is once again available for use.”
Revolving Credit vs. Non-Revolving Credit
As the name suggests, non-revolving credits can not be used more than once. The account is shut after it is paid-off such as is the case with auto loans, students loans etc. An interest rate and a fixed payment schedule will be provided to you at the time of borrowing money. You need to keep up with the monthly payments, else you might be charged with a penalty. Non-revolving credits are less risky. Why? Because typically some collateral is tied in an agreement which can be seized by the lender if you fail to make the payments. As soon as you pay off the balance, the account is shut. You would have to go through application processes again if you wish to borrow an additional fund.
The best part of non-revolving credit is that you have the chance of being approved for higher amount. If there is no red flag when it comes to total income, credit history and other factors then this type of credit can help you score a larger amount. However, whichever credit you are opting for, always review the terms and conditions of borrowing carefully. You don’t have to agree to anything that might hurt your credit in the long run!
Does Revolving Credit Affect Credit Score?
Whether the revolving credit can help you fix your poor credit score depends on how you use it. As is the case with all other types of credit, a revolving credit account can help you or hurt you financially. Let’s say you are fresh out of college and do not have a credit history yet. In this case, getting a starter credit card, making small purchases and paying off your bills timely and in full can be a great start to building an excellent credit score.
Flashcard! “Making your payments on time is the single biggest factor in your credit score, so be sure to meet your payment due dates. See if it’s possible to set up auto-pay so you never miss a payment.”
Another important factor to keep in mind is the credit utilization ratio as mismanagement in this aspect can prove to be a fatal blow to your overall credit score. It is always advisable to keep the balance less than 30% of your total available credit. Here’s how you can calculate you utilization rate:
Credit utilization ratio = (total credit card balance / total credit limit)
Revolving accounts can affect your credit score in several ways. On a good note, it adds a little bit of credit mix which is beneficial for your credit score. It shows that you are responsible enough to manage different kinds of credit.
However, applying for a revolving credit account can result in an hard inquiry. This is because the lenders will always request your credit file from the bureaus to check how reliable you are as an applicant. Such an inquiry can adversely affect your score although the dip may only last for a few months. Consequently, revolving account may be a good idea but getting several credit cards can also suggest to the authorities that you are not financially stable.
Frequently Asked Questions About Revolving Credit
1. Is revolving credit different from installment loans?
Ans. Yes. The two terms carry different meanings. Installment loans means you have borrowed an amount that you have to pay back in a set period of time. Once the payment is complete, the account is shit. However, with revolving account, you can borrow the money again within the credit limit as soon as you are done paying down the previous balance.
2. What are the chances that your application for revolving credit account is rejected?
Ans. The chances are same as with other types of credit. However, there are few things you can keep in mind to avoid being rejected. First of all, make sure that you have a good to excellent credit score. Also, avoid filling out too many applications for different credit types. If your request is approved, it is always a good practice to space out future applications for at least a few months.
3. What are different types of revolving credit accounts?
Ans. Typically, there are three types of such credit accounts. These include:
- Personal lines of credit.
- Credit Cards.
- Home equity lines of credit.
Revolving credit can prove to be a useful way for paying off both: one-time expenses and on-going purchases. Furthermore, if you know how to be financially responsible, then you can use it to manage cash flow and improve your credit score fast.