What is a Revolving Credit?
Revolving credit is a type of credit that is extended to consumers, and does not have a time limit or installment payments. Instead, the credit may be used and paid off as needed, generally as many times as needed. A credit card is the most common type of revolving credit, though a home equity line of credit is another type. Note that this differs from a home equity loan, which functions as a standard loan with installment payments over a period of time.
This concept can be well illustrated with an example. Since a credit card is the most common type of revolving credit, consider a credit card with a limit of $1,000 US Dollars (USD). The credit card holder is free to charge as much as he or she wants of that $1,000; one may charge all of it, or just $100, for example. This amount must then be paid off over time, with a monthly payment based on a percentage of the amount charged rather than an installment payment based on the original amount.
One may continue to use a revolving credit card, adding to the balance even while it is being paid off; this is how most people use credit cards. Once the entire line of credit has been paid off, the credit card may be left open for future charges, and the process may start over again. Of course, the consumer may choose to close the credit card after paying it off as well, at which time the line of revolving credit will be closed. Consider this in relation to a standard personal or auto loan, where a certain amount of money is loaned to a consumer; set monthly payments are determined for a number of years, and once the loan is paid off, it is closed automatically, and may not continue to be used.
Revolving credit is one of the most common methods of making purchases, and it is a great way to build up one's credit history. Making payments on time, and paying on the debts owed, as well as holding a line of credit for many years, are all good ways to improve a credit score. Of course, if the entire balance of the line of credit is not paid off each month, interest will be charged. This interest can vary based on one's credit score and payment history, and can get quite expensive, so be sure to read all the fine print before signing up for a new line of revolving credit.
"@SurfNturf" - I agree with you. I just want to say that getting a revolving credit loan from a credit union is also a great idea. They tend to have competitive rates because since they are considered a nonprofit their profits have to be given back to the members.
Also many credit unions offer assistance with car buying services. For example, my credit union offers an Auto Branch service that allows the member to call up and tell the Auto Branch department what type of car they were looking to purchase and then they can find the exact car and negotiate the price ahead of time for you.
Many times these dealerships waive their prep fees and other additional charges and you end up paying a rock bottom price. Sometimes they will also offer auto sales events in which you can get financing on a new or a used car. I think that once you get preapproved the preapproval process is good for 30 days.
Credit unions are worth looking into.
"@Cupcake15" - I know that a lot of people probably did this to take advantage of some of the great real estate deals out there because the banks were not easily financing these types of condos.
I think that it is a good idea to have an open revolving line of credit in case of an emergency and your savings account might not be able to cover the expense.
These types of revolving credit agreement lines work just like a credit card and you only make payments when you use the line.
If you pay it off you still have it around in case you need it again. I would not recommend a revolving line of credit for people that are compulsive spenders or gamblers because you might just lose your home and you can’t take that kind of a risk.
If you are responsible with your money it is a great way to offer you an additional safety net in case you or your spouse ever loses your job.
I wanted to say that I had a friend that obtained a revolving line of credit in order to buy another property. Her home was paid off and she qualified for a mortgage and had the down payment but the building in which she was looking to buy a property from was considered a cash only building.
This meant that the banks were not issuing mortgages on these properties because the foreclosure rates in the building were higher than 15%, and more than 50% of the occupants were renters. So in order to buy the property she used this revolving credit mortgage loan in order to buy the property.
Since this was considered a cash sale there were no additional closing costs and the closing was completed in about ten minutes. This is really not the traditional way to buy a second property but when the banks won’t finance it directly you can use a home equity line and finance the property that way.
She told me that the bank gave her ten years to pay off the amount and she was offered a variable rate line at .25% above the prime rate. She can make additional payments and can reapply to extend the terms if she needs more time.
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