The Advantages of Revolving Debt

Revolving debt is an open-ended form of credit that is not required to be paid off by a certain date. Instead, you can carry a continuous balance and make only required minimum monthly payments. Common examples of revolving debt include credit cards and home equity lines of credit. Revolving debt can offer certain advantages over closed-end debt, although users must manage it carefully to keep it under control.

Ease of Access

Revolving debt allows easy access to credit. If you have a credit card, you simply present it to a merchant when making a purchase instead of applying for a loan. You can continue to make purchases until you have reached your credit limit. If you have demonstrated you can manage the debt responsibly, your lender may increase your credit line with no action necessary on your part.

No End Date

While there is normally a monthly due date for minimum payments, there is no finite end date to your revolving debt credit line. You could conceivably owe on a credit card for the rest of your life, assuming you continue to make any required minimum payments and fees in a timely manner. This makes it a useful tool to protect against unexpected financial emergencies where you need money quickly and may need time to pay it back.

Flexibility

Revolving debt can offer a high degree of flexibility. Although you are required to make minimum monthly payments, the amount is relatively small when compared to your outstanding balance. On credit cards you may only have to repay 2 or 3 percent of the amount you owe each month. You can also make larger payments if you prefer or pay off your entire balance each month to avoid interest charges. There can be serious ramifications to not paying the amount of closed-end debt due each month or not paying off the entire debt by the end date, and sometimes prepayment penalties apply for paying more than the amount due each month.

Broad Use

There are usually no restrictions as to how you use the money you obtain with revolving debt. If you tap into a home equity line of credit, where you borrow against the equity you've built up in your home, the money can be used for virtually any purpose. You can also use a credit card to purchase anything from a merchant that accepts your card. When you take out a car loan, on the other hand, the money you borrow only applies to financing the vehicle.