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What is Revolving Credit?

Published March 7, 2024
6 min read

Key points about: revolving credit

  1. With a revolving credit account, you can spend up to the credit limit assigned by your lender if you pay off the balance each month.

  2. When you spend money on your revolving account, your credit limit decreases by the amount you spent.

  3. When you pay your balance, your credit limit increases again by the amount you paid.

Ever considered applying for a credit card or a home equity line of credit? If so, you probably have an idea of how revolving credit works. These are common examples of revolving credit. Revolving credit accounts allow you to borrow up to a limit, repay what you owe, and borrow again from the same account. You can use revolving credit to finance major expenses such as home renovations or even day-to-day expenses such as gas and groceries.

How does revolving credit work?

When you open a revolving credit account, such as a line of credit or a credit card, your lender will assign you a credit limit. Your credit limit is the maximum amount you can spend on that account. On your due date, you’ll ideally pay off what you spent since the last due date. If not, you’ll be expected to pay at least the minimum payment due. Once you’ve paid, your available credit (the amount you can spend) will increase by the same amount that you paid. With credit cards, billing cycles are typically monthly.

This means that if you have a credit limit of $2,000, and your billing cycle commences on the 1st of the month, it’ll end on the 30th. You'll start with $2,000 to spend on your card. If you start at $2,000 and spend $1,000 by the 30th, you’ll have $1,000 of credit left at the end of your cycle.

Assuming your card is paid in full prior, if you pay back the $1,000 you spent on your due date, you’ll start the next billing cycle with $2,000 in available credit again. If you pay back $500, your available credit will increase by $500, less any interest assessed. The amount of interest is determined by your credit card company. Usually, you must pay off the entire balance by your due date each month to avoid interest charges.

What are the different types of revolving credit?

Although they share similarities, there are many kinds of revolving credit accounts including credit cards, and home equity and personal lines of credit.

Credit cards are the most known type of revolving credit. When most people think of a credit card, they tend to think of an unsecured credit card. While unsecured credit cards are the standard, secured credit cards are also a great option for people who are new to credit or want to repair their credit. If you can’t get approved for an unsecured credit card, you can apply for a secured credit card to see if you’re eligible.

Once you’re approved for an unsecured card, you receive the card with a credit limit on it determined by your credit card issuer. With a secured card, you must be approved and put down a security deposit before you can start using it. Typically, whatever amount you’re asked to put down for the security deposit will be your credit limit. You would then use the card the same way you would an unsecured card, spending up to the credit limit and paying down the balance every month.

Did you know?

The Discover it® Secured Credit Card can help you build a credit history1 and there’s no credit history required2 to apply for one.

Home equity line of credit

A home equity line of credit (HELOC) allows you to borrow against the value of your home. Think of it the way secured credit cards let you borrow against a security deposit. According to the Consumer Financial Protection Bureau (CFPB), HELOCs have a draw period, also known as a borrowing period, during which you can access funds. Once the draw period ends, you must begin repaying your balance. At the end of the repayment period, you can renew or close out your line of credit, depending on your lender. Keep in mind that since your house is collateral, failing to repay the balance may put your home at risk.

Personal line of credit

A personal line of credit (PLOC) is similar to a credit card. The CFPB explains that, with a PLOC, you'll have a credit limit, monthly bills, minimum monthly payments, and interest accrual based on your outstanding balance. Like a HELOC, you can borrow during your draw period. A key difference is that PLOCs are unsecured, so they don’t require collateral.

Revolving vs. nonrevolving credit

Nonrevolving credit refers to installment loans such as personal loans, mortgages, and student loans. The key distinction between revolving credit and nonrevolving credit is that revolving credit is an open-end credit line while installment loans are considered closed-end.  

Revolving credit

Revolving credit allows you to borrow the funds you need when you need them. You can borrow multiple times from the same account as long as you’re below your credit limit and pay back what you borrow. You only pay interest on what you borrow, and if you pay your balance in full and on time every month, you shouldn’t pay interest at all.

Nonrevolving credit

The U.S. Federal Reserve explains that nonrevolving credit is “closed-end credit extended to consumers that is repaid on a prearranged repayment schedule.”  This can include a personal loan, car loan, mortgage, or student loan. Like revolving credit, nonrevolving credit can be secured or unsecured. But unlike a revolving account, once you’ve paid off your loan, you’ll have to enter into another loan agreement or apply for a new loan in order to access additional funds.

How can revolving credit accounts affect your credit score?

Revolving credit accounts can have a big impact on your credit. They influence factors that impact your credit score, like payment history, credit mix, credit utilization, and age of accounts.

Your payment history is one of the most important factors that make up your credit score. If you miss a monthly payment, your creditor will inform the three major credit reporting agencies.

Credit utilization is also important and refers to how much of your available revolving credit you’re using at any given point in time. The lower you keep your balances, the better.

Credit mix takes into consideration how many credit accounts you have open. How you manage multiple accounts may indicate whether you can responsibly manage different types of debt.

A long credit history, especially one with on-time payments, can also be beneficial to your credit score.

How can you manage a revolving credit account responsibly?

Credit cards can help you build good credit, provided you use them responsibly. Here are a few tips to help you manage your revolving credit account responsibly:

  • Make your monthly payments on time and in full. If you can’t pay in full, at least make your minimum payments to avoid late fees and delinquency history on your credit report.
  • Borrow or spend only what you know you can repay.
  • If you must carry a balance on your credit account, try to ensure it doesn’t exceed 30% of your credit limit.
  • Check your credit report regularly to ensure everything is accurate.
  • If you have debt, consider effective ways to work through it such as consolidating your debt via a balance transfer.

Before applying for any type of credit, it’s a good idea to know how it works and how it may affect your credit score. Revolving credit can be a great way to improve your credit score if you spend responsibly and pay off your balance on time.

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  1. Build/Rebuild Credit History (Secured Card): Discover reports your credit history to the three major credit bureaus so it can help build/rebuild your credit if used responsibly. Late payments, delinquencies or other derogatory activity with your credit card accounts and loans may adversely impact your ability to build/rebuild credit.
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