What Is a Revolving Account on a Credit Report?

Each individual's credit report reflects his history of accruing and paying debt. When a consumer applies for a revolving account and is approved, his creditor will report the new account to the credit reporting agencies. The account's information will then update periodically on the individual's credit file as he makes new purchases and payments.

Facts

A revolving account is a line of credit with a pre-set credit limit. A borrower may make purchases against her revolving line of credit up to the spending limit. Every time the individual makes a payment, the amount of the payment is deducted from the balance she carries on the account. Thus, the debt "revolves" as the consumer makes purchases and payments. Two common examples of revolving accounts are home equity lines of credit and credit cards.

Significance

Credit scoring formulas take the balance an individual carries on his revolving accounts into consideration when determining his credit score. The credit scoring formula developed by the Fair Isaac Corporation, known as the "FICO score," is the most common credit score pulled by lenders. The amount of debt a consumer owes comprises 30 percent of his FICO score. In order to maintain the best credit score possible, consumers should carry low balances on their revolving accounts, even paying off those balances each billing cycle if possible.

Time Frame

Once a creditor reports a revolving account to the credit bureaus, the account will remain on the individual's credit report indefinitely if she keeps the account open and continues to accrue debts and pay them off. If the borrower opts to close the account voluntarily, the entry may remain for seven to ten years, depending on the credit bureau. Should the credit provider close the account due to nonpayment, the debt will have a negative impact on the borrower's credit rating and must be removed from the debtor's credit file after seven years.

Function

Revolving accounts on a credit report serve to inform future lenders of a borrower's ability to successfully manage his financial obligations. Any late payments a debtor makes to his credit provider will be reported to the credit reporting agencies. Although a 30-day late payment has an adverse effect on credit scores, a 60-, 90-, or 120-day late payment has a much greater impact. Lenders review balances and payment histories when evaluating new credit and loan applications to determine whether the applicant meets the company's qualifications and, if so, to assign each applicant an appropriate interest rate.

Warning

Should a borrower fail to pay off her revolving debt, the creditor may write off the balance she owes and sell the account to a debt collection company. The debt collection company may then add fees to the account, report the account as a collection to the credit bureaus and even sue the debtor. Collection accounts are significant derogatory notations within consumer credit files. Should the debt collection company sue the consumer and win, a record of the court's judgment will appear on her credit report, damaging her credit rating even further.