Financial Team

A credit card is a typical example of a revolving credit account. In contrast to installment credit, revolving credit is a type of credit that doesn’t have a set number of payments due.

For example, an installment plan loan, such as a car loan or home mortgage, has a set principal balance that will eventually be paid off. Revolving credit accounts are more open-ended and don’t have a time limit associated with them.

Aside from credit cards, lines of credit at the bank also qualify as revolving credit accounts. It works as follows: You are given a set amount that you are able to borrow, also known as a credit limit. This limit can be as little as $500 or as much as $50,000, depending on your credit rating.

As long as you continue to make payments, you can borrow up to the limit. As you pay the balance down, your amount of available credit increases again. As you add to the balance, your available credit decreases. Thus, your credit account is “revolving.”

The amount of credit in your revolving credit account is available to you no matter how many times you run the balance up and pay it down, as long as you continue to pay back the money on time.

Revolving credit is popular among consumers because it’s easy to get approved and it is convenient to use. Even people with checkered credit histories are generally able to obtain some form of credit card, and it’s virtually impossible today to do anything without one–from making a purchase online to reserving a hotel or rental car for travel. The flexibility of revolving credit makes it an indispensable part of modern life.

This flexibility comes at a price, however. Depending on your credit rating and payment history, interest rates can vary widely and are generally higher than they would be on a typical installment loan. Also, the credit issuer retains the right to increase your interest rate at any point if you are unable to pay your bills on time.

It’s also important to remember that your minimum monthly payments are based on a very small percentage of your overall balance–sometimes as low as 2 percent. If you are in a financial bind, having the flexibility to make a low payment can be useful.

However, if you are only making the minimum payment every month, you won’t pay off the principal and probably won’t even pay off the interest on your revolving credit account. Most experts suggest you pay over the minimum to avoid falling into the trap of credit card debt.

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Tags: Account, Credit Account, Revolving Credit, Revolving Credit Account