What is revolving credit and how does it work?

Posted on jul. 27 2022 By: Oneblinc 5 min. read

If you don’t plan your spending or use your credit card for emergencies, the bill can become expensive. If you will not be able to pay the full amount, revolving credit is an alternative. Do you ever wonder “what is revolving credit?” and how does it work? 

It is important to understand the revolving credit definition to avoid misunderstandings with the financial institution responsible for the credit line. Keep reading to ease your doubt about “what is revolving credit?” and be ready to avoid it or to use it every time you really need it.  

What is revolving credit?

Understanding the revolving credit meaning can be simple if you have an example. Imagine your credit card bill is $3,000, but you only have half of the amount in your account. How can you deal with this situation: pay what you can? Pay in monthly installments? Leave it for the next month? Ask for a loan? 

If you choose to pay just what you can, revolving credit would come into action. It permits the rest of the bill to be paid back over time with interest and fees. You will be charged, but you still have the facility of paying in smaller amounts. Still, in the end, the total will be larger than the first value you couldn’t pay.

It is important to know that revolving credit will be in the next bills until you finish the payment. So be aware that you must be able to pay your latest expenses and this one. Keep that in mind to avoid missing track of your bill again. 

If you were wondering “is revolving credit good”, the answer can be yes and no, because it depends on the point of view. It is good due to the fact that it allows you to pay monthly. On the other hand, it is bad due to the higher interest and fees that increase the value of the debt. 

How does it work?

Now that the answer to “what is revolving credit?” has been given, it is time to know “how does revolving credit work?”. The first thing you need to know is that the payment is more flexible, even though you must be careful to pay the full monthly amount to avoid more interest. 

A revolving credit account sets a credit limit on how much you can spend on it. You can choose to pay the balance at once or take it for the next months, leaving it open for the period you want. It means that you don’t have a defined date to quit the debt. It must be paid while the account is opened.  

Woman holding a credit card while looking at her cellphone.

That means, when you revolve a balance, you must pay a minimum amount every month. The value can vary if the institution chooses a fixed amount or a percentage of the total, but both are higher. In case you have the money to make a full payment, it can be better. 

Remember that just like other credit lines and loans, you have to make the payments on the right day. If you miss it, leave it for the next date, and make late payments, you will be charged again. 

Does it affect credit score?

In general, credit lines can impact a credit score. Each person has a credit utilization ratio that shows the available credit compared to the amount used, including the revolving credit. This metric impacts credit score because it shows if you are using your credit more than you can. 

If your ratio is high, it means the balance is also high, but once you finish the payment, and it is reported, the score will be back to normal. That is why it is important to keep this ratio low and pay as soon as you can. 

In case you also want to take out a loan in the future, follow the advice of a low utilization to be seen as responsible with your credit. It is a positive thing that also determines good creditworthiness.

By knowing “what is revolving credit?” and how it impacts your credit score, you can be aware and choose the best alternative: using this facility or not, paying at once or monthly. 

Revolving credit x installment 

An installment loan has a few differences from revolving credit. The first one is that you must follow a set period of payment and a fixed amount. If you miss the date, you also have fees and interest rates that make it higher than the original amount taken. 

Another difference is you can only take one loan at a time. Once you finish, you can apply for another. On revolving credit, you don’t have a limit and can use it how many times you want, which means you can have more than one payment in the same monthly bill. 

Usually, revolving credit can be accessed automatically when you don’t pay the full bill, while a loan requires an application and a financial analysis. That means a loan can be difficult and varies according to your profile.

Count on OneBlinc to get the help you need!

“What is revolving credit?” is not a question that bothers you anymore. Now, you can choose the best alternative if you don’t have the money to pay the full amount on your bill. Looking for an easier option? Get a loan and financial help at OneBlinc!

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