What Is a Revolving Account, and How Can You Use It to Your Benefit?
A revolving credit account is a type of credit tool that can be used to your advantage to help you pay for important life purchases.
Contributing Writer at Tally
May 13, 2022
When it comes to managing your personal finances, one of the terms you may hear frequently is “revolving credit” or “revolving account.” But what is a revolving account?
A revolving account enables you to tap into a set amount of money for an undefined period of time. As long as you don’t exceed your credit limit, you can use the funds as you see fit.
We’ll cover what revolving accounts are, how exactly they work and whether they are a good or bad option for your finances.
What is a revolving account?
A revolving account is a type of credit account that allows you to borrow up to a predetermined amount of money for an unlimited amount of time. The predetermined amount of money is known as a credit limit. This is the maximum that you’re allowed to spend on the account.
Types of revolving accounts include:
Personal lines of credit
Home equity lines of credit (HELOC)
Revolving credit accounts are notably different from non-revolving accounts. With non-revolving accounts, you borrow a set lump-sum amount. You then make monthly payments to repay the principal and interest charges. Common types of non-revolving accounts include:
Now that you know what a revolving account is, let’s look at how revolving credit works.
How does a revolving account work, and when do you pay the money back?
To better understand how revolving accounts work, let’s use a credit card as an example. You open a new credit card and receive a $5,000 credit limit — that is the maximum amount you’re allowed to spend on the account.
Let’s say you spend the maximum amount and then make a $1,000 payment. Your outstanding balance would now be $4,000, and your available credit would be $1,000.
Credit card accounts typically do not have an expiration as long as your lender does not close your account. The lender would probably only do this if you fail to make minimum payments on time, which we’ll touch on more below.
As a quick note: Your actual credit card may expire, at which point your lender will send you a new one. The expiration date is on the back of the card. However, the account itself — the access you have to available credit — will not expire.
It’s also worth noting that revolving lines of credit may have actual expiration dates.
Personal lines of credit often have two periods of time: the draw period and the repayment period. During the draw period, you can withdraw and use funds as much as you’d like, as long as you make the minimum payments your lender requires and don’t exceed your credit limit.
Once the repayment period kicks in, you won’t be allowed to draw against the line of credit anymore. At this point, you’ll only be repaying your remaining outstanding balance.
With a revolving account, you need to be mindful of your due dates and minimum required payment amounts. Your lender will likely require you to make minimum payments each month. Additionally, any amount remaining on your debt may be subject to interest each month.
For example, your credit cardissuer will send you a monthly statement. Your statement will include your total outstanding balance and minimum payment. You then typically have three weeks to make a payment toward your statement balance. This length of time is known as the grace period, as your lender doesn’t charge interest during this time.
Upon receiving your statement, you can do one of three things:
Pay off your full balance
Make the minimum payment, or pay more than the minimum but not the full balance
Pay less than the minimum payment
In scenario one, you won’t be charged any interest. As long as you pay off your balance in full by the due date, you do not have to worry about accruing interest charges.
In scenario two, you will be charged interest on your outstanding balance. The interest charges are added to your balance, which reduces your available credit.
Scenario three is the same as scenario two regarding interest charges added to your account. In addition, you will likely be charged late fees and penalties, which will further reduce the total credit and borrowing power that you have available.
Are revolving accounts a good or bad kind of debt?
Revolving accounts can be good or bad for your personal finances, depending on how you use them. They can allow you to borrow money for something important when you otherwise wouldn’t have that money available.
For example, let’s say that you are faced with an unexpected charge, like needing new brakes on your car. You need the car to get to your job and make an appointment to get the brakes replaced on June 2. Your next payday is on June 15.
By placing the expense on a credit card, you can have your car repaired without delay. You will not owe interest as long as you pay off the expense in full by the statement due date.
This situation could perhaps be better solved by having an emergency fund in place, but that may not always be feasible or you may not have enough cash in your emergency fund to cover the entire expense.
Revolving accounts may also be worthwhile because of rewards like travel points or cash back. Spending on your revolving credit account could earn you rewards that you can apply to other purchases. However, these types of accounts may come with annual fees that you’ll want to consider before opening such an account.
Lastly, you can use revolving accounts strategically to help pay down debt. For instance, if you open a revolving account with a lower interest rate than the one you have currently, you can pay down your current debt and potentially reduce how much interest you will have to pay back.
By paying down existing debt, you’ll increase the amount of credit you have available. This, in turn, will decrease your credit utilization rate and potentially increase your credit score. When used responsibly, revolving accounts can allow you to establish a strong payment history and build a good credit score.
However, revolving accounts are not a good idea if you don’t use them properly. If you don’t make on-time payments in full, you will begin accruing interest.
Paying off credit card debt can be particularly challenging because the interest compounds, creating a long-term effect on your credit history. When interest compounds, the interest charges are added to your existing balance. Your future interest charges will be calculated based on this new balance. Essentially, you’re charged interest on top of interest.
Even if you can’t pay off your balance in full, you’ll want to make sure that you pay at least the minimum payment amount each month on time. Late payments are an important factor in credit scoring models. A poor credit score can impact your ability to secure future lending.
Ultimately, revolving accounts are what you make of them. If you use them responsibly, they can be a great tool to help you collect rewards, pay down debt and build credit. However, if you start missing payments, you can end up doing far more harm than good to your personal finances.
Revolving accounts should be used responsibly
A revolving account allows you access to a set amount of money, as long as you don’t exceed the credit limit. Examples of revolving accounts include credit cards and lines of credit. When used correctly, they can help you pay down debt, earn rewards or cover expenses in an emergency.
Now that you know what a revolving account is, you just have to remember how important it is to make a payment each month by the due date. If you can’t pay off the balance in full, pay as much as you can — or, at the very least, the minimum payment.
It’s a good idea to pay as much as possible because your lender will begin charging you interest on any balance that remains. This will reduce your future borrowing power and potentially impact your credit score.
If you’re struggling to pay off the balances on your revolving accounts, there are tools available to help. For example, Tally is a credit card payoff app†designed to help you manage your bill due dates and pay down your existing credit card debt quickly and efficiently with a lower-interest line of credit.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.