Revolving Account: What They Are, How They Work, Types

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.

Key Takeaways

  • 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.
  • Types of revolving credit include home equity lines of credit (HELOCs) and credit cards.
  • Examples of non-revolving credit includes car loans and mortgages.

How a Revolving Account Works

A revolving account gives a borrower spending flexibility with an open credit line up to a maximum specified limit. Once the borrower repays what they borrowed, they can borrow that amount again.

Some types of revolving credit, such as most credit cards, are open indefinitely. Other types of revolving credit, such as a home equity lines of credit (HELOCs) have a set term after which you cannot borrow against the line of credit.

Revolving credit is associated with accounts that have a revolving balance. Credit cards, personal lines of credit, and home equity lines of credit (HELOCs) are some of the most common types of revolving accounts.

How to Get Revolving Credit

Revolving accounts are available for both individual and business customers. They require a standard credit application that considers financial factors like your credit history and debt-to-income ratio. You can usually apply for a revolving credit product online, often getting approved that day.

In the underwriting process, the underwriters determine whether you are eligible for approval and how much the lender is willing to lend. If you are approved for a revolving credit account, the lender will provide a maximum credit limit and account interest rate terms.

Using a Revolving Account

Revolving accounts with credit cards often have no maturity date and can remain open as long as the borrower is in good standing with the lender.

An important component of a revolving account is your available credit. This amount changes with payments, purchases, and interest accumulation. You are allowed to use borrowed funds up to the account’s maximum limit. Any unspent funds are your available credit. Make sure you fully understand the terms of your credit.

Your balance and available credit will vary each month depending on your purchases and payments. When you make a purchase, your outstanding balance increases and your available balance decreases. When you make a payment, your outstanding balance decreases and your available balance increases.

At the end of a month, the lender will assess the monthly interest and notify you regarding the amount you owe. This payment amount includes a portion of the principal and interest accumulated on the account.

Revolving account balances accumulate based on your 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.

Credit Score Considerations

Revolving credit accounts can play a large role in your credit score.

It's important to make timely payments of at least the minimum amount on a revolving account as delinquency can negatively impact your credit score.

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

Non-revolving loans are loans made in lump sums and then repaid with fixed regular payments during a set time period. Once the loan is paid off, the borrower cannot reborrow those funds.

Non-revolving loans are often be used for buying a car or home. In these situations, the loan is typically also secured with collateral, which lowers the risk. As a result, non-revolving loans often have lower interest rates than revolving loans.

What Are 3 Examples of Revolving credit?

Three examples of revolving credit are a credit card, a home equity line of credit (HELOC) and a personal line of credit. Revolving credit is credit you can use repeatedly up to a certain limit as you pay it down.

What Is the Disadvantage of Revolving Credit?

The downside of revolving credit is that it often comes with higher interest rates. Particularly with credit cards, higher interest rates on a balance that carries over from month to month can create a cycle of debt. You can end up paying a significant amount of interest in the long term.

How Does Revolving Credit Affect Your Credit Score?

Your FICO credit score is based in large part on the amount of debt you borrow compared to the amount of credit available to you. So if you use most of the credit on your credit card, your score will be lower than if you only used a small percentage. Financial experts recommend aiming to keep your credit utilization below 30%.

The Bottom Line

Revolving credit can be a useful financial tool to help you build credit and make purchases you need. It can offer convenience and flexibility. However, misusing revolving credit can also cause financial harm. To avoid damage to your credit score and long-term finances, make all the minimum payments on time and have a plan for fully repaying the balance in full.

Article Sources
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  1. Consumer Financial Protection Bureau. "The Extent of Revolving Credit in the U.S. Credit Market."

  2. Consumer Financial Protection Bureau. "What You Should Know About Home Equity Lines of Credit."

  3. Consumer Financial Protection Bureau. "Credit Cards."

  4. Consumer Financial Protection Bureau. "Know Before You Owe: Credit Cards."

  5. Consumer Financial Protection Bureau. "Categories of Late Payments."

  6. Experian. "Credit Utilization Rate."

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