What Is a Revolving Account?
A revolving account is a type of credit account that provides a borrower with a maximum limit and allows for varying credit availability. Revolving accounts do not have a specified maturity date and can remain open as long as a borrower remains in good standing with the creditor.
- A revolving account provides a credit limit to borrow against.
- These types of accounts provide more flexibility, with an open line of credit up to a credit cap.
- Revolving lines are usually credit cards or home equity lines while non-revolving lines are often car loans or mortgages.
How a Revolving Account Works
A revolving account gives a borrower flexibility to have an open credit line up to a maximum specified limit. Borrowers have the option to apply for revolving or non-revolving credit.
Revolving credit is associated with accounts that have a revolving balance. Credit cards, banking account lines of credit, and home equity lines of credit are some of the most common revolving accounts.
Obtaining a Revolving Account
Revolving accounts are available for both individual and business customers. They require a standard credit application that considers a borrower’s credit history and debt-to-income.
In the underwriting process, the underwriters determine whether a borrower is eligible for approval and how much the lender is willing to lend. If a borrower is approved for a revolving credit account the lender will provide a maximum credit limit and account interest rate terms.
Maintaining a Revolving Account
Revolving accounts have no maturity date and remain open as long as the borrower is in good standing with the lender. An important component of a revolving account is the borrower’s available credit. This amount changes with payments, purchases, and interest accumulation. Borrowers are allowed to use borrowed funds up to the account’s maximum limit. Any unspent funds are referred to as the borrower’s available credit balance.
Revolving accounts are maintained through monthly account statements that provide borrowers with their account balances and required payments. Monthly payments on revolving accounts change with the additions and deductions made on the account.
When a borrower makes a purchase, it increases their outstanding balance and decreases their available balance. When a borrower makes a payment, it decreases their outstanding balance and increases their available balance. Thus, a borrower’s balance and available credit will vary each month.
At the end of a month, the lender will assess the monthly interest and notify the borrower regarding the amount that must be paid to keep the account in good standing. This payment amount includes a portion of the principal and interest accumulated on the account. Revolving account balances accumulate based on a borrower’s purchase and payment activities. Interest accumulates each month as well and is usually based on the sum of daily interest charged throughout the month on any outstanding balance.
It's important to make timely payments on a revolving account as delinquency can lead to a lowering of your credit score or worse.
Credit Score Considerations
Revolving credit accounts typically encompass a majority of the open accounts on a borrower’s credit score. Revolving account borrowers must make minimum monthly payments to the lender each month.
Missed payments on revolving accounts are treated the same as any other delinquent payments. Creditors will report delinquency after 60 days. They typically allow for 180 days of missed payments before they take the default action. In the case of default, the borrower’s account would be closed and a default would be reported to the credit agencies, which would result in an even more severe credit score reduction.
Revolving vs. Non-Revolving
Many borrowers consider both revolving and non-revolving loans when they are researching new credit accounts. Non-revolving loans are often an option for borrowers seeking to make large purchases or consolidate their debt. They can be used for buying a car or buying a home, for example. In these situations, the loan is also secured with collateral, which is an added benefit for a non-revolving loan.
In a non-revolving loan, a borrower receives a maximum principal amount in a lump sum upfront when they are approved for the loan. These loans have a specified duration, which varies by the type of credit product. Non-revolving loans also typically require monthly installment payments and will generally have interest rates in a similar range to revolving credit.
The Federal Reserve provides a breakdown of industry revolving and non-revolving credit each month. As of May 2021, revolving credit accounted for 23% of the credit market’s total $4.28 trillion in outstanding debt.