Revolving Credit

Revolving Credit Definition and Meaning

Revolving credit is a line of credit you can borrow against up to your credit limit and repay in full or over time. As you repay your line of credit, you can borrow again. 

Types of Revolving Credit

There are two popular types of revolving credit that people tend to use:

• Credit cards provide a spending limit based on factors that include your credit score and income

• Home equity lines of credit (HELOCs), which are lines of credit secured by equity you have in your home

Comprehensive Breakdown of Revolving Credit

With a revolving credit account, you're given access to a line of credit you can borrow from as needed. There are three terms you need to know:

• Credit limit: the maximum amount you can have outstanding

• Account balance: the amount you currently owe on the credit line

• Available credit: your credit limit minus your account balance

As you borrow against your line of credit, the balance increases and your available credit decreases. But as you repay what you've borrowed, your available credit replenishes, allowing you to borrow again.

Revolving credit gives you the flexibility to borrow on an as-needed basis. You could get approved for $10,000 in revolving credit and only borrow $1,000 initially. Or, you could borrow the whole $10,000 at once.

It's also possible to increase an existing revolving credit line without having to go through a new application. For example, if you have a credit card with a $10,000 limit but your income rises, you could ask your credit issuer to increase your credit line to $12,000.

With revolving credit, it's important to be mindful of how much you've borrowed, since your line of credit does have a limit. You'll also need to be careful to avoid borrowing more than you can afford to repay. Plus, it’s wise to reserve some of your credit line for emergency expenses. 

Also, using too much revolving credit could hurt your credit score, making it harder to qualify for more revolving credit should you need it. Credit usage, also called balance-to-limit or credit utilization,  is a big component of calculating credit scores. Using too much of your revolving credit on your credit cards could cause your score to drop.

Example of Revolving Credit

You receive a credit card with a $12,000 spending limit. If you charge $3,000 your first month, you'll be left with $9,000 of available credit. 

If you repay your $3,000 balance in full, your line of credit will be restored to $12,000. You'll be able to keep charging against that $12,000 credit line over and over again as long as your account remains in good standing (meaning, you're at least up to date on your minimum monthly payments).