While the words ‘revolving credit’ might seem new and foreign, you will know precisely what revolving credit is if you’ve used a credit card. Revolving credit is a line of credit that can be borrowed, repaid, and borrowed again as long as the account remains open.
From secured and unsecured revolving credit cards and business lines of credit to home equity lines of credit, revolving credit lines are more common than you think. So, while you’ve swiped your credit card a hundred times, you’ve probably missed the revolving credit angle and how it works. We will cover that in the following few sections.
A revolving credit account is a type of loan account that’s automatically renewed as debt dues are cleared. In other words, you can borrow from the account, repay dues, and borrow again without applying for a new line of credit. So, unlike regular loans, revolving credit lines don’t give you a one-time lump-sum amount. Instead, they give you a constant funding source.
It’s like having a set reserve of funds that can be accessed whenever needed. Moreover, this reserve doesn’t deplete when you borrow - as long as you don’t breach the credit limit. Repaying the sum restores this reserve so you can borrow from it again. In other words, revolving credit gives you access to an ongoing credit line.
Now that you know what revolving credit is, it's time to understand how it works:
If you qualify for a revolving credit amount - like revolving credit cards or lines of credit- the lender will set a credit limit on the account. Your creditworthiness will determine this maximum limit on the amount you can charge to the account.
Next, your lender will open a revolving credit account in your name. You can access the sanctioned funds from this account as and when needed. Each time you use the funds to make purchases, the spent amount gets deducted from the prescribed credit limit. However, once you start making payments, the repaid amount (minus interest and fees) gets added back to the available credit in the account.
While you can choose to pay the due balance in full, you don’t have to. You can meet minimum monthly payment requirements and carry the balance forward as a ‘revolving balance’. However, doing so will increase your interest burden as interest charges apply to the current balance owed.
Let’s say you have a revolving credit card with a Rs. 1 Lakh limit. You spend Rs. 40,000 on the card to purchase a television. Your revolving credit balance will then be Rs. 60,000. Once you repay the Rs. 40,000, your credit reserves will get restored to Rs. 1 Lakh.
However, if you repay Rs. 20,000 and carry the balance forward, you will have to pay interest on the balance and any other expenses you incur in the next billing cycle.
If you need to raise working capital for your business or immediate funds for a medical emergency, revolving credit can help. This flexible funding source allows you to borrow funds within a limit, meet your needs, and conveniently repay the dues to restore the credit line.
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Yes. Revolving credit is good when you need immediate access to funds but don’t have the time to apply for a regular loan. However, like all types of credit, you must manage revolving credit judiciously to prevent taking credit score hits and financial strains.
Generally, revolving credit of up to 30% of the sanction credit limit is accepted as a good number. Breaching the 30% limit will negatively affect your credit score.