Definition: Revolving debt is debt that typically has a variable interest rate, an open-ended term and payments that are based on a percentage of the balance. Revolving debt has a pre-determined limit, agreed upon by the lender and borrower.
Revolving debt is the kind of debt that credit cards offer and is usually an easy way to get credit. It can be a useful tool when used with discipline.
Revolving debt is slightly complicated compared with a typical loan. There is no need to reapply for credit whenever you need more money. Instead, a lender, usually a bank, approves you for a credit limit, which is the maximum amount the bank will let you borrow. The bank decides what the limit will be by examining your income, assets and credit history. This lets the lender know how much debt you can afford to take on. The lender then issues you a credit card - the source of the revolving debt.
Once you have the credit card, you are able to use it to borrow up to your limit. For example, if your credit card has a $5,000 credit limit, that is how much debt you are able to put on that card, including any finance charges and interest. As you use the credit card to make purchases, they are subtracted from the credit limit.
As you repay the debt, the amount you’ve paid becomes available for you to borrow again. For example, if you charge a $500 purchase on your credit card and repay $100 the first month, you can borrow back the $100 immediately.
Certain lending products are usually revolving debts. For example, credit cards, home equity lines of credit and overdraft protection for checking accounts. Home equity lines of credit usually come with a variable interest rate, which means that the interest rate can change.
Revolving debt usually has an open-ended term. It has no end date; it is a continual source of a loan as long as you pay the appropriate fees and make your minimum monthly payments. The minimum payment for revolving debt is based on a percentage of the amount of debt, so the minimum payment can change from month to month.
Revolving debt is easy to get, but it is also very easy to abuse. It should only be used with discipline. Borrowing to make purchases that you really cannot afford, and then taking too long to repay the debt, spells financial trouble. As long as revolving debt is used with discipline, it can be a useful tool. Be sure to stay on guard and keep from abusing it, though.
