Revolving credit: what is it and how does it work? | Chase (2024)

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Revolving credit: what is it and how does it work? | Chase? ›

What is revolving credit? If you're wondering what revolving credit is, you may be more familiar with it than you think. Revolving credit is a type of loan that's automatically renewed as debt is paid. It helps to give cardmembers access to money up to a preset amount, also known as the credit limit.

Common examples of revolving credit include credit cards, home equity lines of credit (HELOCs), and personal and business lines of credit. Credit cards are the best-known type of revolving credit. However, there are numerous differences between a revolving line of credit and a consumer or business credit card.

Revolving credits are flexible. In technical terms, they are liquid. Any money you put in can be taken out, the same as any other bank account. That's why many borrowers will put all their salary and wages into their revolving credit, and then pay their expenses out of this account.

The main risk to revolving credit is taking on more debt than you can repay. Luckily, you can avoid debt problems by always repaying what you borrow in full every month.

Revolving credit, particularly credit cards, can certainly hurt your credit score if not used wisely. However, having credit cards can be great for your score if you pay attention to your credit utilization and credit mix while building a positive credit history.

To maintain a healthy credit score, it's important to keep your credit utilization rate (CUR) low. The general rule of thumb has been that you don't want your CUR to exceed 30%, but increasingly financial experts are recommending that you don't want to go above 10% if you really want an excellent credit score.

Revolving credit or revolving accounts function by giving you the choice to withdraw funds multiple times until you reach a set limit (or your credit limit). You decide how much money you borrow and how much your repayments will be, beyond the minimum payment requirements.

Unlike installment credit, a revolving credit account remains open indefinitely. As long as you make your minimum payments and don't exceed your credit limit, you'll be able to draw on your revolving credit as you see fit.

If you make regular, consistent payments on a revolving credit account, the lender may increase your maximum credit limit—known as an accordion feature. There is no set monthly payment with revolving credit accounts, but interest accrues as it would for any other form of credit.

Does revolving credit have a limit? ›

When you're approved for a revolving credit account, like a credit card, the lender will set a credit limit. The assigned credit limit is the maximum amount of money that you can charge to the account.

There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.

Generally speaking, it's better to keep an account open and use the card sparingly, if at all, than it is to close the account.

This means that if you want continuous access to the money you borrowed, a revolving loan may be better suited to your needs. If you only need a once-off amount for a specific purpose, a personal loan may be the best option for you.

Credit cards and lines of credit are both examples of revolving credit. Instalment loans are non-revolving, because you must pay off the loan over a specific period with fixed monthly instalments. There's far more flexibility involved with revolving credit in comparison to paying off a non-revolving credit balance.

The bank charges interest on the unpaid balance when you do not pay off the balance in full every month. Typical interest rates can range from 10% to 29%, based on credit history and the lender.

Revolving credit lets you borrow money up to a maximum credit limit, pay it back over time and borrow again as needed. Credit cards, home equity lines of credit and personal lines of credit are common types of revolving credit.

Credit cards and lines of credit are both examples of revolving credit.

A term loan involves borrowing a fixed amount of money, repaying this sum with interest over a specified term. Conversely, a revolving credit facility operates similarly to a credit card. This affords businesses a credit limit that they can borrow against, repay and borrow again.

A revolving line of credit requires just one application, and you can access the credit again after you've paid off your balance. With a non-revolving line of credit, once you pay off your balance, the account is closed, and you would have to submit another application.