Revolving Credit Agreements

Unlike traditional business accounts, revolving credit agreements allow a person or a business access to a line of credit that does not have to be paid out over the course of a specific period, unlike a loan agreement. Revolving credit agreements simply require the minimum amount to be paid off on a monthly basis.

Credit Cards

Credit cards are one example of revolving credit agreements. When you receive your credit card statement, you'll see your credit limit, your balance and the minimum amount you must pay. Revolving credit card agreements allow you to have a balance, as long as you make your minimum payments. These minimum payments usually cover areas such as interest and service charges. When you only pay off the minimum balance each month, however, it takes you much longer to pay off your debts than if you paid down on the actual principal each month.

Business

Businesses use revolving line of credit agreements to get financing. The bank lends the business a certain amount of money, and as the business pays back the loan, it gets that money back. This borrowing tool is used when a business worries about being able to get additional capital. Revolving business credit agreements require the business to have a suitable business credit score. Some ways businesses can start establishing business credit are to apply for business credit cards and to try to get vendors to provide lines of credit.

Home Equity

Another type of revolving credit agreement is a home equity line of credit. In this kind of revolving credit, your home is actually put down as collateral on a revolving credit account. The lender sets the credit limit at a certain percentage of the home appraisal value and subtracts the balance due on the mortgage. So, if a house is appraised at $250,000, the lender can set a percentage of 75 percent to reach a percentage of the appraised value of $187,500. If there remains $100,000 on the mortgage, the line of credit will be for $87,500. The lender also factors in credit history, as well as any current financial obligations you're carrying when a credit limit is established.

Disadvantages

One disadvantage with a revolving line of credit is being tempted to spend more than you need. For example, if you have a revolving credit line and under the terms of the agreement, you're provided up to $10,000 worth of credit, you might be tempted to borrow more money than you need to borrow, simply because it's available. Another disadvantage is the terms that you're using the credit line. While a loan from a bank is straightforward and has conditions locked in, revolving credit accounts can change conditions with little notice.