Revolving Credit

Financial Dictionary -> Loans -> Revolving Credit

Revolving Credit is a method applied to various credit and loan agreements where there are no fixed regular payments or a fixed number of payments, as opposed to regular monthly installments. Credit cards are a common form of revolving credit where payment can be rolled over for a number of months.

In the example of a credit card the holder of the card is allowed to make purchases up to a certain credit limit. At the end of the month they are required to pay at least some of this borrowed money back, the rest is rolled over for another month and interest is added on top. This credit can revolve for a number of months until it all gets maxed out. If the card holder pays the balance off in full each month then the credit limit increases, or at least stays the same. This is basically a continual loan that is continually paid off. It's classed as revolving credit because the borrower didn't take out one lump sum and begin to pay it back in regular installments.

Other common forms of revolving credit include bank overdrafts and lines of credit for businesses. They all have credit limits but are not conventional loans because that sum wasn't taken out at once and set in to a repayment cycle. It can vary from month to month.

A home equity line of credit is another form of revolving credit although there is no physical card involved. The credit limit is dependent on the equity (amount paid off from a mortgage) in your home and is secured against your home, allowing for better interest rates. You can constantly dip in and out of the jar as you please.

Some common characteristics of revolving credit include having a pre-approved credit limit of which the borrower can withdraw money up to that amount, the increasing and decreasing of the credit limit in relation to how much has been borrowed and repaid, the ability to use the credit repeatedly at any time and the ability to repay the sum all at once as opposed to installments.