Revolving credit is like a well that never goes dry -- as long as you regularly replace the water. It’s one of two basic forms of credit available to individual consumers and businesses and is typically available as a credit card or line of credit.
Give and Take
A revolving credit balance begins with your credit limit. If you have a $5,000 limit and you don’t charge anything or use any of the money, you have a zero balance. If you do use the account, interest typically isn’t charged if you pay your entire balance -- everything you’ve borrowed -- within the monthly billing period. You can take $5,000 again the next month if you want to. But if you charge $1,000 and make only a minimum payment, you now have about $4,000 in credit. Some portion of your payment will go toward interest, but if you don't have an interest-only account, some will go toward your balance as well. You'll free up that much of your credit limit so you can use it again. This cycle is “revolving,” because your balance may go up or down in any given month depending on the amount of your payments and how much you’ve charged.
Pros and Cons
Unlike a car loan or mortgage with a finite life span, a revolving loan or account doesn’t terminate on a given date when you pay the entire amount off. It stays open and you need only pay a small percentage of your balance to stay in good standing. But there are typically annual fees for all this convenience. And the interest rate is rarely constant; it can fluctuate with the economy or increase if you fail to perform and make payments as agreed.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.