Revolving debt is credit that you can continue to borrow from as long as the account is open. Revolving accounts have an established credit limit, but you can continue to borrow more on the same line of credit once you pay down your balance on revolving debt.
It’s important to understand revolving debt since it can affect your credit score differently than installment debt. It’s also easy to take on too much debt since you can continue borrowing after paying off your debt. Our guide will break down everything you need to know about revolving debt.
How Revolving Debt Works
With revolving credit, you have established lines of credit that you can continue to draw on and use. Your credit limit is established by the lender and is determined by your income, assets and credit history.
Here are the basics of revolving debt:
- Your credit issuer sets the minimum payment due each month and these payments are a percentage of how much you borrow. This means that the amount of your monthly payment can change.
- You aren’t obligated to pay off the entire balance each month, but you’ll be charged interest on whatever balance you still owe. Revolving credit — such as credit cards — often have high-interest rates.
- As you pay down your balance, you can continue to borrow more until you reach your credit limit.
For example, if you reach your credit limit of $300, a payment of $100 will immediately allow you to borrow an additional $100.
Types of Revolving Debt Accounts
Some types of revolving debt are backed by your assets, while others are not. The most well-known form of revolving debt is a credit card, which is unsecured. A home equity line of credit is another common form of revolving debt, which is secured by your home.
The most common forms of revolving debt accounts are:
- Credit cards
- Home equity line of credit
- Personal line of credit
- Overdraft protection for checking accounts
Revolving Debt vs. Installment Debt
Revolving debt and installment debt are both factored in to your credit score. If you make a late payment on either, your score will dip.
Revolving debt has an open-ended term, meaning that you can continue to borrow on the account as long as you pay the minimum amount due.
With installment debt, you borrow a fixed amount in a lump sum with loan terms that dictate when it will be paid off. Unlike revolving debt, you cannot borrow more as you pay down the balance. Examples of installment debts include student loans, auto loans and personal loans.
The danger with revolving credit is that you can continue to spend on that card while you still owe a balance as long as you don’t reach your credit limit. This makes it harder to pay off the account.
How Revolving Debt Impacts Your Credit
Having a mix of different types of credit accounts can help build your credit score. If you’re able to successfully manage different types of credit accounts, it shows lenders that you’re responsible.
Revolving debt in the form of credit cards can look riskier to lenders since it’s unsecured. However, it all comes down to how you manage your credit.
Using your credit cards wisely by taking on small amounts of debt and making regular payments can build your credit, but missing a payment can negatively impact your credit score. There are other ways revolving debt impacts your credit. Here are some examples:
- High credit utilization ratio: Your credit utilization is the amount you owe versus the amount available to you. Your score can drop if you’ve reached your credit limit on all your credit cards.
- Number of open revolving accounts: There is no specific number of credit cards that is considered the right number, but lenders take it into consideration along with your credit history and other scoring factors.
- Age of open revolving accounts: The older your revolving accounts, the greater the benefit to your credit score. A longer history of responsibly managing credit makes you look less risky to lenders.
How Installment Debt Impacts Your Credit
Installment debt is typically considered less risky since it’s secured by an asset. It’s also considered more stable, so it has less of an impact on your credit score.
Here are a few ways installment debt impacts your credit:
- Credit mix: Your mix of credit accounts will improve if, for example, you’ve only taken out credit cards.
- Payment history: Installment debt can positively influence your score if you continue to pay on time.
- Credit utilization ratio: You can use installment debt like personal loans to pay off high balances on your credit cards to bring down your credit utilization. This will positively benefit your score as long as you keep up with payments and keep your utilization low moving forward.
- Hard inquiries: Shopping around for installment loans like mortgages and auto loans triggers hard inquiries that lower your score.
Revolving Debt and Your Credit Score
The more credit accounts you have, each with their own type of payment system, the more complicated it can be to manage your finances. It’s easy to miss a payment. It is also possible for your lenders to make a mistake and inaccurately report a missed payment on your revolving debt.
The credit repair consultants at Lexington Law can help you remove questionable negative items that impact your credit score. Since revolving debt can make a bigger impact on your credit score, it’s important to address errors on your credit report as soon as possible. Call us today to learn how our team of credit consultants can help you clean up your credit report.