There are many different types of credit available to consumers today. Making sure you are informed about what is available and how different account types can impact your credit rating is crucial to making right decisions.
‘Revolving’ credit or ‘Revolving’ accounts are among the most common types of credit. Let’s look at the differences between revolving credit accounts and other types of credit, and how revolving credit can affect your credit score.
What Is Revolving Credit?
Revolving credit accounts are so called because you can ‘revolve’ or carry a balance on the account from month to month. A lender provides maximum funds up to a credit limit that the borrower can pull from at their discretion. Common forms of revolving credit include home equity loans, personal or business lines of credit, and credit cards. Common characteristics of revolving credit include:
- Allowing a borrower to purchase any goods and services at any time up to the credit limit.
- Not requiring payment in full within a specified timeframe, but a minimum payment toward the balance is expected every month.
- Allowing payments to be made at any time.
- Accruing interest on the amount of credit spent in a given time.
- Allowing the balance on the account to be carried over month to month if the minimum payment is made.
- Once a payment is made, those funds become available to borrow again.
Difference Between Types of Credit
Here is a breakdown of how revolving credit accounts differ from other specific types of credit.
Revolving Credit vs. Installment Loans
Installment loans typically come in set amounts of funds that do not regenerate as you use and then pay them back. The lender often includes a payment schedule to the borrower as well, setting out predetermined payment amounts and dates that must be followed. Once the loan is paid back, the account is considered closed.
This contrasts with a revolving account, which remains open until the borrower decides to close it. The borrower can also decide the timing and amount of payments made on the account, if it meets or exceeds the minimum payment. Finally, money paid back to a revolving account becomes available to use again in the future.
Make the Most of Your Revolving Credit
Revolving credit accounts, such as credit cards, can have a major impact on your credit rating and your overall ‘risk’ factor to lenders. It is important to use these accounts carefully, creating a positive reflection on your credit rating and preserving your creditworthiness for the future. Here are some helpful tips to ensure the best possible impact on your credit score:
- Spend only what you know you can afford to pay back.
- Make all payments on time.
- Try to pay off the balance in full each month even though it is not required. By doing so, you will avoid paying interest.
- Aim for less than a 30% credit utilization ratio1; the lower it is, the better for your score.
Since revolving accounts are so common, it’s very likely that you will have one or more at some point. If you exercise caution and control over your revolving credit accounts, you should see your credit rating improve over time.