Revolving credit and a line of credit are types of financing that allows you to borrow money as you need it, repay with minimum payments, and then borrow again. A lender provides funds—up to a certain credit limit—that can be used and paid back at the borrower's discretion.
Revolving credit and lines of credit have similarities and differences. Revolving credit remains open until the lender or borrower closes the account. A line of credit, on the other hand, can have an end date or terms for a time period when you can make payments but not withdrawals. Learn more about how these two products differ.
Key Takeaways
- Revolving credit and lines of credit offer borrowers flexibility with how much credit they use and reuse.
- You can use revolving credit and repay it over and over again up to a certain credit limit.
- Credit cards are a form of revolving credit.
- A line of credit can include terms about when the credit availability will close.
- Home equity lines of credit (HELOCs) are a type of line of credit.
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Revolving Credit
When a lender issues revolving credit, it sets a credit limit. This limit is based on factors like your credit score, income, and credit history. You can use and reuse your credit continually as long as you make minimum payments according to the terms. Revolving credit accounts typically remain open indefinitely.
When payments are made on the revolving credit account, those funds become available to borrow again. The credit limit may be used repeatedly as long as you do not exceed the credit limit.
One common form of revolving credit is credit cards, which are often used for everyday purchases. You can can also use revolving credit for major purchases or ongoing expenses, such as paying bills.
If you make regular, consistent payments on a revolving credit account, the lender may increase your maximum credit limit—known as an accordion feature. There is no set monthly payment with revolving credit accounts, but interest accrues as it would for any other form of credit. Borrowers owe interest on the amount they draw, not on the entire credit line.
A significant part of your credit score (30%) is your credit utilization rate. Most credit experts recommend keeping this rate at 30% or below so it doesn't have a negative impact on your credit score.
Line of Credit
With a line of credit, you can use funds up to a certain limit, just like a credit card. With a personal line of credit, which can be a type of revolving credit, you can use checks to withdraw funds from your line of credit. A line of credit is often used for larger projects, such as a renovation, where the exact costs are difficult to calculate.
With non-revolving lines of credit, the available credit does not replenish after you make payments. So when you use a non-revolving line of credit and pay it off in full, the account is closed and can no longer be used.
Revolving Credit vs. Line of Credit Examples
Credit cards are the most common form of revolving credit. You are assigned a credit limit—the maximum amount you can spend. You then make payments of any amount greater than the minimum payment due according to the terms. You can then reuse the amount you paid down.
Credit lines can be non-revolving and revolving. An example of a non-revolving line of credit is a personal line of credit offered by a bank in the form of an overdraft protection plan. A banking customer can sign up to have an overdraft plan linked to their checking account. If the customer's balance dips below zero, the overdraft keeps them from bouncing a check or having a purchase declined. Like any line of credit, an overdraft must be paid back, with interest.
A home equity line of credit (HELOC) is an example of a revolving credit line. A preapproved amount of credit is extended based on the borrower's equity. The funds in the account can be accessed in various ways, via check, a credit card connected to the account, or by transferring funds from one account to another. You can continue borrowing and repaying without the need for additional approvals. You only pay interest on the money you use, and the account offers flexibility to draw on the line of credit when needed.
Secured vs. Unsecured Credit
Both revolving credit and lines of credit come in secured and unsecured versions. Secured credit is backed by a tangible asset, such as a house in the case of a HELOC, which serves as collateral. Interest rates on secured credit lines tend to be much lower than those on unsecured credit accounts because they lower the risk for the lender.
Loans tailored to a specific purchase, such as a home or a car, are often good alternatives to opening a line of credit. They can offer lower rates by using the asset such as the home or the car to back the loan.
How Lines of Credit Differ From Traditional Loans
Both revolving credit and lines of credit are different from traditional loans. Most installment loans—mortgages, auto loans, or student loans—have specific purchasing purposes in mind. You must tell the lender what you are going to use the money for ahead of time and, unlike with a line of credit or revolving credit, you may not deviate from that.
Line of credit payments tend to be more irregular. Unlike with a loan, you are not being lent a lump sum of money and charged interest right away. A line of credit allows you to borrow funds in the future up to a certain amount. This means you are not charged interest until you actually start tapping into the line for funds.
Do Revolving Accounts Hurt Your Credit?
Revolving account can hurt your credit if you use them irresponsibly. If you make late payments or use the majority of your available credit, your credit score could suffer. However, revolving accounts can also benefit your finances if you make payments on time and keep your credit use low.
What Are 3 Types of Credit Cards?
Three types of credit cards include rewards cards, 0% introductory rate cards (balance transfer cards) and branded credit cards. More broadly, there are two main types of credit cards: secured and unsecured. Secured credit cards require a down payment to be used as collateral.
What Is A Good Credit Utilization Rate?
A good credit utilization rate is under 30%. Your credit utilization ratio is a metric that compares the amount of credit you've used to your available credit. Credit utilization is a major factor in determining your credit score.
The Bottom Line
The difference between revolving credit and a line of credit is mainly that the line of credit may have terms for when full repayment is due and you may no longer borrow. Revolving credit is generally open indefinitely. Which type of credit is right for you will depend on your spending needs. Revolving credit used with credit cards is more appropriate for smaller, everyday purchases whereas lines of credit are generally used more for larger purchases like a renovation project.
