Revolving Debt: Definition And Examples

If you have an outstanding balance on your credit card, that’s considered revolving debt, and it’s the most commonly held type of debt in the U.S. While debt is usually associated with negative outcomes like delinquent accounts and overdue bills, revolving debt can actually help build your credit score – if it’s handled correctly.

Let’s take a closer look at how revolving debt works and some examples, plus how to use revolving debt to your advantage.

Revolving debt is any balance you carry from an account that allows you to borrow against credit. There are no specific loan terms for revolving debt, and it often comes with a variable interest rate.

While you’re ultimately required to pay back the money owed, revolving debt isn’t repaid based on a fixed monthly schedule. The most well-known type of revolving debt is credit card debt since card holders can carry a balance as needed.

Credit cards, lines of credit and home equity lines of credit (HELOCs) are the most common examples of revolving credit, which turns into revolving debt if you carry a balance month-to-month. Unlike with installment loans, you can continue to borrow money from any of these accounts before making a minimum payment or paying off your balance to avoid late fees or interest charges.

Let’s probe deeper into these examples of revolving credit and the types of debt that result, so you can learn about their similarities and differences.

Credit Cards

The first question most people ask when they’re approved for a new credit card account is, “What’s my credit limit?” That spending limit dictates how much money you can borrow against that card, as well as your monthly payment.

Since credit cards are revolving accounts, borrowers aren’t required to pay off their full balance each month. However, they’re encouraged to pay it down to free up more of the credit line for the next month’s purchases. Most credit card issuers allow a grace period on transaction repayments before charging interest, but don’t forget: Your credit card balance accrues interest on a monthly basis.

Personal Line Of Credit

Personal lines of credit are similar to credit cards in that both types of credit accounts provide a preset amount of monthly credit. Just like a credit card, these revolving accounts allow borrowers to spend money, pay off part of it and carry that balance into the next month. Personal lines of credit can also be accessed through a card and typically last many years, depending on your lender and credit history.

Different from a credit card, most personal lines of credit don’t have a grace period between when you withdraw funds and when you repay what you borrowed. In fact, any balance will automatically accrue interest.

Home Equity Line Of Credit (HELOC)

HELOCs are different from the previous two types of revolving credit accounts in several ways. If you take out a HELOC, you’re borrowing against your home’s equity, which is used as collateral for that line of credit. If you mishandle the HELOC, you could potentially lose your house through foreclosure.

This type of revolving credit is somewhat similar to personal lines of credit but differs from credit cards because there’s a preset “draw period” for spending money. Once the draw period ends and the repayment period begins, you’re responsible for paying back the money owed, plus interest.

Now that we know how revolving debt works, let’s dive into installment debt.

An installment loan requires borrowers to repay the money owed in fixed amounts over a set period of time. It’s especially important to follow the payment schedule because multiple missed payments can result in heavy fines, damage to your credit score, foreclosure or repossession of any assets that were used as collateral to the loan. Common examples of installment loans are mortgages, student loans, auto loans and personal loans.

For example, let’s say you’ve been approved for a 30-year mortgage on a $350,000 home. If you take on a $280,000 mortgage with a 3.25% fixed interest rate, you’ll be expected to make a monthly payment of just under $1,219. If you’re late on any of these monthly payments, you’ll default on the loan and your lender will likely foreclose on your home since it’s considered collateral for the mortgage.

Revolving credit is usually intended for shorter and smaller loans, while installment credit mostly applies to large purchases that require long-term payment plans. The same goes for revolving and installment debt; the former can and should be paid off quickly, and the latter is paid off in portions over time.

This is why some borrowers may use installment credit to pay off revolving debt, such as in the example of using a personal loan to consolidate credit card debt. Fixed monthly payments can be easier to budget for, and a longer loan term can reduce the monthly payment amount.

Revolving debt may seem like a slippery slope that can lead to credit card debt or losing your home, but when handled carefully, it can improve your personal finances and FICO^® Score. Use the following frequently asked questions to learn more about revolving debt.

How does revolving debt affect my credit score?

Any kind of debt – revolving or installment – will likely appear on your credit report. In fact, having a diverse credit mix can help maintain or even increase your credit score.

Revolving credit card debt plays a big role in determining your credit score because it directly impacts your credit utilization ratio. This metric represents the percentage of your available credit line that you’re using. That’s why carrying a high balance on your credit card can weaken your credit score over time.

Since your revolving debt status directly impacts your credit score, it’s recommended that you pay off debts quickly to avoid lowering your credit score. Missing payments or using too much of your credit line could also negatively impact your credit health.

Should I use revolving credit instead of another type of credit?

Most consumers have at least one form of revolving debt, usually from using a credit card, but that doesn’t mean you should go ahead and fill out a credit card application. Deciding whether to use revolving credit should primarily depend on your personal situation and financial goals. 

To help you determine if revolving credit is the right choice for you, consider the following benefits and drawbacks.

How can I use revolving debt to boost my credit score?

As mentioned, revolving debt can help boost your credit score – but only if you do the following:

• Make on-time payments: Not only will you avoid late fees by making on-time payments, but you’ll help your credit score by proving you have a strong payment history. These days, it’s easy to set up auto-pay features for credit card bills so you never miss a payment.
• Keep your credit utilization ratio low: It may seem counterintuitive to not use your full line of credit, but keeping your credit utilization ratio low will help improve your credit score. It’s generally recommended that you keep your credit utilization under 30%, even if you’re carrying a balance from one month to the next.

Although it can be tempting to make only the minimum monthly payments on a credit card or line of credit, it’s more beneficial to pay off revolving debts quickly. That way, you free up more of your available credit and potentially boost your credit score.

If you already have revolving debt that you would like to pay off, you can consider using a personal loan to consolidate your monthly payments. Not only could this speed up the process of paying off your debt, but you could also take advantage of a lower interest rate and longer loan term. Learn more about debt consolidation to further explore all of its benefits.