Revolving credit is a type of borrowing that allows you to borrow and repay funds as required. It can be an excellent option for people who want to have access to funds when they need them, without going through the process of applying for a loan and then repaying it each time.
In this guide, we will discuss what revolving credit is, how it works, and who it is best suited for. We will also provide some tips on using revolving credit responsibly and avoiding getting into an unhealthy debt cycle.
What is Revolving Credit?
Revolving credit is a type of borrowing that allows you to borrow money up to an agreed limit and then repay it as required, either as a lump sum or over time. The great thing about revolving credit is that you only pay interest on the amount of money that you borrow and not on the full amount of credit available to you. For example, if you have a £1,000 credit limit and you only use £500 of it, then you will only be charged interest on the £500 that you borrowed. This can make revolving credit much cheaper than other types of borrowing, such as personal loans, which usually charge interest on the full amount regardless of how much you actually borrow.
Another benefit of revolving credit is that it can be used for almost anything – from covering an unexpected bill to making a large purchase. And, because you only borrow the money when you need it, there is no need to worry about having a large amount of debt hanging over you when you don’t need the funds. Revolving credit can be an excellent option for people who need access to funds but don’t want to take out a loan every time they need money. It can also be a good option for self-employed people or those who have irregular income, as it can provide some financial stability knowing that there is money available if needed.
However, revolving credit is not suitable for everyone, and there are some risks associated with it. Before taking out a revolving credit facility, it is important to understand how it works and make sure that you can repay the money you borrow.
How does Revolving Credit work?
When you take out a revolving credit facility, you will be given an agreed limit that you can borrow up to. This limit will usually be based on your income and expenditure and your credit history. You can use the revolving credit facility whenever you need to, up to the agreed limit.
Once you have used some or all of the revolving credit, you will need to make repayments. These repayments can be made either in full or in part, and there is usually no set schedule for repayments. This means that you can make a repayment when it suits you, as long as you make at least the minimum required repayment each month.
It is important to remember that, even though there is no set repayment schedule, the money you borrow plus interest will need to be repaid in full at some point. This means that it is important only to borrow what you can afford to repay and make regular repayments to reduce the amount of interest you will pay.
There are two main types of revolving credit facility – an overdraft and a credit card. An overdraft is usually available on a current account and can be used for both day-to-day expenditure and one-off payments. A credit card is a type of borrowing that can be used for purchases, cash withdrawals, and transferring money using the card supplied by your credit provider.
Most overdrafts and credit cards usually have a monthly or annual fee, as well as interest charged on the amount borrowed. It is important to compare different products to find one that best suits your circumstances. Therefore, you would typically use a revolving form of credit when you need to borrow a small to medium amount of money for a short period of time. It can be helpful to access this type of borrowing as it can provide some financial stability, knowing that there is money available if needed.
What is a revolving credit agreement?
A revolving credit agreement is a type of credit facility that allows you to borrow money up to an agreed limit and repay it flexibly over time. The credit agreement refers specifically to the documents signed which outline the terms of your agreement with your lender.
A revolving credit agreement breaks down the exact terms and conditions and they are issued for both retail and commercial loans. In the UK, credit agreements are governed by the Consumer Credit Act, whereas in the US they are governed by federal and state law.
How Revolving Credit Affects Your Credit
Your credit score is a number that represents your creditworthiness – i.e. how likely you are to repay any money that you borrow. In this section, we will explore everything there is to do with credit score: meaning, range, factors, and improving it.
It is important to remember that, even though there is no set repayment schedule, the money you borrow plus interest will need to be repaid in full at some point. This means that it is important only to borrow what you need and to make regular repayments to reduce the amount of interest you will pay.
Missing payments or defaulting on credit facility can significantly impact your credit score, so it is important to make sure that you can keep up with repayments before taking out a revolving form of credit. Many different factors contribute to your credit score, and each lender will have their own criteria for what they consider to be a good or bad credit score.
Typically, an average or ‘good’ amount of revolving credit to have will be around the £500-£1,000 mark. This is because it shows that you can manage your finances and make repayments on time. That said, as long as you’re using a low percentage of your total facility, the impact of revolving credit on your credit score should be positive.
Having too much revolving credit can be a bad thing, as it can show that you are relying too heavily on borrowing. This commonly becomes an issue when you have high credit utilisation, meaning you’re using a high proportion of your total available credit.
If you want to improve your credit score, there are a few things you can do:
- Check your credit report for any errors and dispute them if necessary
- Make all of your payments on time, including utility bills and credit card bills
- Keep your credit balances low, and only borrow as much as you can afford to repay
- Limit the number of applications you make for new credit products
- Always pay more than the minimum payment on your credit card bill
Doing these things can help you to improve your credit score and make it easier to get approved for future borrowing.
Further reading on this subject is covered in our article Credit Score: Meaning, Range, Factors, Improving It.
What are the advantages of Revolving Credit?
The advantages of revolving credit are:
- They provide money when you need it – One of the main advantages of revolving credit is that it can provide you with money when you need it. This can be helpful in several situations, such as if you have an unexpected bill or need to make a large purchase.
- Flexible repayments – There is no set repayment schedule. This means that you can choose when and how much you repay, as long as the minimum payment is made each month. This can be helpful if you have a variable income or can only make repayments on certain days of the week.
- Lower interest rates – Another advantage of revolving credit is that it usually has lower interest rates than other forms of borrowing, such as payday loans. This means that you will save money in the long run by using revolving credit instead of another form of borrowing. Some revolving credit facilities even have introductory interest free periods.
- Easy approval – It may be easier to be approved for revolving credit than other forms of finance. There are many revolving credit lenders, which means that even if you have bad credit, you may still be able to get approved for a revolving line of credit.
- Improved credit score – Revolving credit can help you to improve your credit score. This is because making regular repayments on time can show lenders that you are a responsible borrower. This can make getting approved for future borrowings, such as a mortgage or car loan more likely.
What are the disadvantages of Revolving Credit?
The disadvantages of revolving credit are:
- Minimum repayments – Revolving credit lenders require you to make a minimum payment each month. This can be difficult if you have a low income or can only make repayments on certain days of the week.
- Commitment fees exist – Some lenders may charge a commitment fee. This fee is usually a percentage of the total amount you borrow and can add to the cost of borrowing. It is important to check for any hidden fees before choosing a lender so that you are not surprised by any additional costs.
- You may be declined -Lenders will use your credit score to determine your creditworthiness and whether or not they will approve your application. If you have bad credit, it is still worth applying for a revolving line of credit as some lenders may be willing to approve your application.
- Lower maximum credit limits – Another disadvantage of revolving credit is that you may have a lower maximum credit limit than with other forms of borrowing. This can be frustrating if you need to borrow a large amount of money and are only approved for a small amount. It is important to check the minimum and maximum credit limits of different lenders before choosing one to find one that will suit your needs.
As you can see, there are both advantages and disadvantages of revolving credit. It is important to weigh up these factors before deciding if this form of borrowing is right for you.
What is the difference between Revolving Credit and Instalment Credit?
The main difference between revolving credit and instalment credit is that you are only required to make minimum monthly payments with revolving credit. With instalment credit, you must pay back set monthly repayments and repay the loan in full over the loan term. With revolving credit, you can choose to repay the full amount borrowed plus interest and fees at any time. However, with instalment credit, you will be locked into making regular repayments until the loan is paid off.
Another difference between these two types of borrowing is that revolving credit usually has higher interest rates than instalment loans. Should you pay only the minimum repayments each month, your balance may decrease very slowly, meaning you end up paying a lot more interest in the long run.
As there are pros and cons to each product, you’ll choose to use these types of credit at different times of your life. For example, you could choose to use revolving credit when you need to support your cash flow on an ongoing basis. Conversely, you may choose instalment credit when you need to borrow a large amount of money and want to spread the cost over a longer period of time.
Is revolving credit beneficial?
Yes, revolving credit is absolutely beneficial, but only when it’s used correctly. Abusing the privilege of having this type of credit can result in detrimental effects on your financial stability. It is important to remember that with revolving credit, you are only required to make minimum monthly payments. This means that if you only make the minimum payment each month, it will take you longer to pay off the full amount borrowed plus interest and fees. All in all, revolving credit is a great tool to have at your disposal. However, it is important to use it wisely and not abuse the facility. If used correctly, it can be very beneficial.