What Is Revolving Credit, and How Is Non-Revolving Credit Different?

While the term “revolving credit” may sound unfamiliar at first, you’re probably more familiar with it than you might think. In fact, revolving credit is exactly what credit cards and other common lines of credit are.

So, what is revolving credit? Here’s a closer look at just what it is, why it matters and how to ensure that your accounts remain in good standing.

What is revolving credit?

Revolving credit works by setting a credit limit for a particular account. The lender determines your credit limit based on factors like your income, current debts and payment history. The limit represents the maximum amount of money you can charge to that account at any given time.

At the end of the billing cycle, you will be given a billing statement. This total will vary each month based on how much you spent using that account. However, many lenders provide the option to make a minimum payment rather than pay off the full balance. 

Any charges that you don’t pay off are carried over to your next billing cycle and continue to count against your credit limit. These carryover charges are often subject to additional interest charges. Any amount that you pay off replenishes how much credit is available to you on that account.

For example, let’s say you have a credit card with a limit of $2,000. If your charges at the end of the billing period total $600, paying that total in full would mean you once again have $2,000 of available credit. On the other hand, if you only paid $300, you would have $1,700 in credit still available on your account. The $300 that is carried over from the prior billing period is referred to as your “revolving balance.”

Revolving credit accounts typically have a higher interest rate in part because of their flexibility. Many revolving accounts use variable interest rates that can be adjusted over the life of your account. However, if you have a good credit score, you can often secure lower interest rates.

One other thing to note: Revolving credit accounts don’t come with an expiration date. As long as you remain in good standing with your lender, you can maintain that account in perpetuity. You can close a revolving account with a balance, but you will need to pay off that balance in full.

What is non-revolving credit, and how is it different?

Installment loans, or non-revolving credit, are accounts where you borrow a set amount of money upfront — the principal — and pay off that amount plus interest. This total balance is then divided into a fixed number of monthly payments that remain the same from month to month over a period of time determined in the initial loan agreement. 

Examples of non-revolving credit accounts include auto loans, mortgages and student loans.

Non-revolving credit accounts typically carry a lower interest rate than revolving credit. However, these accounts do have a set expiration date. 

For example, with a 30-year mortgage, you would be expected to pay a set amount each month for the 30-year lifespan of the loan. After you make that final payment, you would own the house outright. You would no longer need to make monthly payments for the property. 

Unless you choose to refinance the loan, the principal that you owe on a non-revolving credit account will never go up because you only borrowed money when you first opened the account. It will gradually go down as your monthly payments pay off the principal and balance.

Common types of revolving credit

Now that you have an idea of what revolving credit is, it can be helpful to see how you use both revolving and non-revolving accounts in your everyday life.

Here are commonly used types of revolving credit.

Credit cards

Credit cards are the most common type of revolving credit. They are very convenient for small purchases, and many come with rewards, such as cash back, travel discounts or gift cards. Try to avoid cards with added expenses like annual fees.

Personal line of credit

A personal line of credit functions similarly to a credit card, but the lender provides the funds via checks and a debit card or even through direct deposit. Personal lines of credit are often used for larger expenses that a credit card couldn’t cover, such as home or auto repairs or debt consolidation. 

A personal line of credit initially offers a “draw period,” during which you can withdraw funds and pay off your withdrawals. At the end of the draw period — which is established when the line of credit is opened — the account goes into a repayment period. During this phase, the remaining balance is converted to a fully amortized loan that you pay off in fixed payments. You cannot draw additional funds during this phase.

Home equity line of credit (HELOC)

HELOCs let you borrow money against the value of your property. Homeowners can borrow and repay as often as they need, though these accounts are also subject to draw and repayment periods. HELOCs are different from home equity loans, which are used for borrowing a one-time lump sum. 

Because the home is the greatest financial asset for many families, HELOCs are often used for home repairs and remodeling. However, they can also be used for other major expenses, such as medical bills.

Best practices for revolving lines of credit

Staying on top of your accounts is crucial for improving your FICO credit score. A high credit score can increase the amount of credit you qualify for as well as help you achieve more favorable interest rates on future loans.

For example, 30% of your FICO Score is determined by your credit utilization ratio. If you are using the maximum available credit on your revolving credit accounts, it indicates that you are overextending yourself financially. 

It is recommended to keep your balances below 30% of your total available credit across all accounts. If you had three revolving credit accounts with a total credit limit of $10,000, you would want to keep your total balance between the three accounts at $3,000 or less.

In addition, 35% of your FICO Score is based on your payment history. Simply making payments for your revolving accounts on time — even if you can’t pay more than the minimum amount — improves your score and helps you avoid additional fees and interest from the lender.

The average American has three credit cards and 2.3 store cards. This can make it harder to keep track of all your accounts. You can avoid late payments by setting up autopay or by making calendar reminders so you don’t forget payment due dates.

Whenever possible, you should try to pay off your balance in full at the end of each statement period. If this isn’t possible, pay off as much as you can without negatively affecting other financial obligations, such as rent or mortgage payments. The more you can pay off, the less of a revolving balance you will carry over.

If you carry a revolving balance, you may want to focus on paying off your accounts with the highest interest rates first. In some cases, it may be a good idea to only pay the minimum amount due on an account with lower interest rates so you can pay off the revolving balance on a higher-interest account faster.

Do your best to spend responsibly. The flexibility and convenience of revolving credit accounts can make it easy to overspend on unnecessary purchases. Be mindful of what you already owe before you spend more. Many issuers now offer apps or websites where you can check your balance in real time so you can better track and manage your personal finance habits.

Manage your revolving credit with Tally

Now that you know what revolving credit is, there’s a good chance you realize that you’re already using this type of account. Tracking your balances so that you can keep up with monthly payments and reduce your total credit utilization is key to improving your credit score.

If you need help managing your credit card debt, consider Tally†. Our secure app allows you to pay off your credit card balances with a low-interest revolving line of credit so you can get out of debt faster with a single monthly payment. 

As you responsibly use your revolving credit accounts, you can take charge of your personal finances and have peace of mind.

†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.