What It Means
Revolving credit is an account that gives you a credit lineCredit limitThe most your card company lets you owe on a credit card or line of credit at one time. See more up to a set limit, which you can draw on as often as you like. Each payment frees that much of the line to use again, so the account keeps going instead of ending when a balance is paid off. You pay interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more only on the part you've borrowed and haven't repaid, and each month you owe at least a minimum payment. Credit cards and lines of credit are the common kinds; a loan paid back in fixed installments, like a car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more, is installment creditInstallment loanA loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan. See more instead.
Try It: Follow a Revolving Line for Five Moves
A $2,000 credit line over a few months. Interest is left out to keep the example simple.
The account opens with a $2,000 limit and nothing owed.
You charge $600 for car repairs. The line shrinks to $1,400.
You pay $400. That $400 is available to use again right away.
You charge $900 more. You borrowed again from the same line, something an installment loan doesn't let you do.
You pay the $1,100 in full. The whole $2,000 is open again, and the account stays open.
How People Say It
- "It's a revolving line, so I can draw on it again."
- "Cards are revolving, the car note is installment."
- "I keep paying it down and running it back up."
The Breakdown
Worked example. A $2,000 credit line over four months, leaving interest aside:
| Month | What happens | You owe | Available |
|---|---|---|---|
| 1 | Charge $600 | $600 | $1,400 |
| 2 | Pay $400 | $200 | $1,800 |
| 3 | Charge $900 | $1,100 | $900 |
| 4 | Pay $1,100 | $0 | $2,000 |
What the result means. The line refills as you pay it down, so the same $2,000 can be borrowed many times over the life of the account. Compare a $2,000 installment loan: you'd get the money once, repay it on a fixed schedule, and the loan would end.
Where it costs you. Any balance you don't clear by the due date collects interest, and on a card that carries a balance month after month, the interest adds up quickly. Revolving balances also set your credit utilizationCredit utilizationThe share of your available revolving credit you're using, found by dividing your card balances by your credit limits. See more: Experian explains that your overall figure adds up the balances on your revolving accounts and divides by their combined limits.
| Revolving credit | Installment credit | |
|---|---|---|
| How you get money | Draw as needed up to a limit | One lump sum |
| Payments | At least a minimum payment each month | A set amount on a set schedule |
| When it ends | Stays open until you or the lender close it | When the last payment is made |
| Examples | Credit cards, lines of credit | MortgagesMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more, car loans, personal loansPersonal loanAn installment loan, usually unsecured, that a bank, credit union or online lender pays out as a lump sum you can use for almost any personal purpose. See more, student loansStudent loanMoney borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender. See more |
Good to Know
The Federal Reserve's G.19 consumer credit release splits household borrowing into revolving credit, mostly credit cards, and nonrevolving credit, which is mostly installment loans, and it publishes card interest rates every quarter if you want the current figure. For credit cards, federal Regulation Z adds rules on top of your agreement, including limits on late fees and the order payments above the minimum are applied, which Buhata's minimum payment and late fee pages explain.
FAQ
Is a credit card revolving credit?
Yes. A credit card gives you a line up to a limit that you can use, repay and use again, which is what makes it revolving. Experian also lists other open-end lines of credit as revolving.
What's the difference between revolving and installment credit?
Revolving credit lets you borrow repeatedly up to a limit, with at least a minimum payment due each month. Installment credit gives you one lump sum that you repay in set amounts over a set term, as with a mortgage or car loan.
Does revolving credit affect my credit score?
Yes. Your revolving balances compared with your limits make up your credit utilization, and myFICO and VantageScore both weigh it, alongside whether you pay on time.
Do It in Buhata
Debt Payoff
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Open BuhataRelated Terms and Categories
- Installment loan
A loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan.
- Credit limit
The most your card company lets you owe on a credit card or line of credit at one time.
- Credit utilization
The share of your available revolving credit you're using, found by dividing your card balances by your credit limits.
- Credit mix
The variety of credit types on your report, such as cards, retail accounts, installment loans and a mortgage; it makes up 10% of a FICO Score.
Sources
Experian, "What Is Revolving Credit?"; Experian, "Installment vs. Revolving Credit: What's the Difference?"; Experian, "What Is Open-End Credit?"; Equifax, "Installment vs. Revolving Credit & Key Differences"; TransUnion, "The Difference Between Installment and Revolving Accounts"; myFICO, "Revolving Credit and Installment Credit: What's the difference?"; Federal Reserve Board, "Consumer Credit, G.19"; Experian, "How to Calculate Credit Card Utilization"
- www.experian.com/blogs/ask-experian/what-is-revolving-credit
- www.experian.com/blogs/ask-experian/revolving-vs-installment-credit
- www.experian.com/blogs/ask-experian/what-is-open-end-credit
- www.equifax.com/personal/education/credit/score/articles/-/learn/revolving-credit-vs-installment-credit
- www.transunion.com/blog/credit-advice/difference-between-installment-and-revolving-accounts
- www.myfico.com/credit-education/blog/revolving-installment-credit-differences
- www.federalreserve.gov/releases/g19/current
- www.experian.com/blogs/ask-experian/how-to-calculate-credit-card-utilization
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