What Is Revolving Debt?

Revolving debt occurs when a consumer borrows money and is required to pay back only a certain percentage of the balance owed each month. Revolving debt differs from non-revolving debt such as mortgages and car loans, where the borrower pays a predetermined amount each month for a specific time period until the obligation is paid in full. Revolving debt offers advantages to the consumer, but also includes some pitfalls.

Features

Revolving debt allows you to carry a balance from month to month as opposed to paying it off in full at the end of the month. Interest is assessed on the balance and you can continue to borrow up to a predetermined limit. There is no set period of time where the balance must be paid off. The amount of payment due each month is typically based on a percentage of the remaining balance. As you pay off your balance, you regain the availability of that amount of credit. For example, if you have a credit line of $5,000 and your balance due is $500, your amount of available credit returns to $5,000 when you pay the $500 balance.

Benefits

Debtors benefit from revolving debt because it allows them to purchase items without having to pay the full purchase prices up front. This can be helpful in emergency situations, such as when the refrigerator breaks down and you don't have the cash to buy a new one. Creditors benefit from revolving debt by earning interest on the balances that are carried over.

Types

Perhaps the most common type of revolving debt is the use of credit cards. Credit card companies allow you to charge items to your account up to your credit limit and charge interest on your balance. Another typical type of revolving debt is a home equity line of credit where you borrow against the equity in your home.

Considerations

With revolving debt you can increase the amount of available credit without having to reapply for another loan or card. For example, as long as you have used your credit card responsibly and make your payments on time each month, you can request that your credit card company raise your credit limit.

Warning

Misuse of revolving debt can have harsh financial consequences. According to MSN Money, the average American household carries about $8,000 in credit card debt as of 2010. With the required minimum monthly payment typically at 2 percent, that means a payment of $160 is required. The number of personal bankruptcies doubled from 2000 to 2010, in large part due to easy access to revolving debt.