The Definition of a Revolving Line of Credit

Revolving credit, also referred to as open credit or a revolving charge account, is a consumer credit arrangement that allows the borrower to buy goods or secure loans on a continuing basis as long as the outstanding loans do not exceed a specified limit, according to Black's Law Dictionary. The loan principal usually is paid off in monthly installments.

Function

The borrower decides each month whether to pay off the entire balance on a revolving line of credit or carry some of it over to the next month. If any of the balance is carried over, the creditor charges interest, and this accrues as long as the balance goes unpaid. Each line of credit has a maximum limit, and each purchase counts against that maximum. You maintain access to your credit line by remaining in good standing with the creditor.

Benefits

Consumers can use revolving credit accounts to buy anything they'd like as long as they don't exceed their credit limit. This is particularly useful for making large purchases because these can be paid for in smaller increments instead of in a lump sum upfront. Also, using a revolving credit account for several small purchases and paying them off on time is a good way to build up good credit for major purchases, such as a house or a car.

Considerations

A revolving credit account is a useful financial tool as long as you can make the monthly payments. However, a job loss or other financial issue can cause problems. Also, you pay more when using credit than when paying with cash because of the interest fee, so the Federal Trade Commission advises consumers to calculate the true cost of an item, including interest, before charging it.

Process

Generally, it is not difficult to get approved for a revolving credit account if you have a good credit history. The procedure often is as simple as submitting an application and proof of income to the creditor, and credit card companies occasionally send applications to potential borrowers through the mail. The FTC recommends shopping around when opening a credit account because fees and interest rates can vary greatly by creditor and to read any fine print on a credit application.

Types

Credit cards and home-equity lines of credit (HELOCs) are the two primary types of revolving credit. While any consumer with good credit typically is able to get a credit card, only those who own their homes and have equity in them can obtain a home-equity line of credit. Interest rates for HELOCs generally are lower than those for credit card because the homes are used as collateral, making them secured loans.