What Is Revolving Debt?
Revolving debt (also known as revolving credit) is a credit account with a reusable limit. You can borrow up to your limit, repay and borrow again. Revolving debt is the portion of your credit limit you’re currently carrying as a balance. Credit cards are a form of revolving debt.
Knowing how revolving debt works and how it differs from other financial products (like loans) is the first step in choosing the option that’s right for you.
- Revolving credit (like a credit card) allows you to borrow as needed. You can borrow up to a certain amount (your credit line). Paying back what you borrow opens up credit that you can use again.
- Installment debt comes in one sum, either to you (like a personal loan) or to an entity selling property (like an auto loan or mortgage).
- Borrowers can find themselves in a financial bind if they don’t use revolving credit responsibly. It can be easy to overborrow, and interest usually compounds on perhaps the most popular form of revolving debt: credit cards.
What is revolving debt?
Revolving debt is a type of debt that you can draw from, repay and continue to draw from over time. A common example of revolving credit is a credit card.
Revolving debt comes with credit limits and typically has variable interest rates, or interest rates that fluctuate with the market. When you have revolving debt, you’ll only owe interest on the amount you owe as opposed to the entire credit line that’s available to you.
Most often, revolving debt doesn’t come with fixed repayment terms. Instead of needing to pay off your debt in whole by a certain date, you’ll be required to make minimum monthly payments. Each payment you make frees up more credit that you can borrow from again.
Revolving credit can escalate into bad debt. It can be easy to spend more than you planned because funding is always available (as long as you have the credit available. Interest compounds on some types of revolving debt, namely credit cards. This means interest grows on the interest itself, not just what you charged.
That doesn’t mean that revolving debt is always a bad choice. Otherwise, revolving debt wouldn’t be so popular. But you should be careful to avoid charging more than necessary, and always have a realistic payoff plan.
Types of revolving credit
There are multiple types of revolving credit. Revolving credit can come in the form of both secured and unsecured debt. Secured debt requires collateral and unsecured doesn’t.
Here’s what you need to know about some of the most common forms of revolving credit:
- Credit cards may be best for purchases that you can pay off quickly. If you have excellent credit, you could qualify for a 0% intro APR credit card. This type of card lets you avoid interest charges for an introductory period — sometimes up to around two years.
- Personal lines of credit are less common than credit cards, but some banks and credit unions offer them. Many personal lines of credit (PLOCs) have a draw period, when you can borrow as needed and make minimum payments, followed by a repayment period, when you pay down the remaining balance over time. Others have an indefinite draw period, which makes them function more like a credit card.
- Home equity lines of credit allow you to tap into the equity you’ve built in your home. While credit cards and PLOCs don’t typically require collateral, home equity lines of credit (HELOCs) are secured by your home. This makes them risky. If you don’t make your HELOC payments on time, you could lose your house.
Pros and cons of revolving credit
Revolving credit pros
- Can borrow as you need
- Could skip interest using a 0% intro APR credit card or by paying your credit card bill in full each month
- Can earn rewards and cashback using certain credit cards
- HELOCs can come with lower rates since they use your home as collateral
Revolving credit cons
- Can be easy to overborrow since money is available as long as you have open credit
- Rates (especially for credit cards) can be higher than personal loan rates
- Using a lot of your available credit can increase your credit utilization, possibly harming your score
Revolving credit can be helpful if you don’t know exactly how much you need to borrow, since you can borrow over and over again (assuming you have the credit available).
For example, a HELOC might be a good choice for home improvements with no end price tag. You must be absolutely certain you can keep up with payments, however. Otherwise, you might lose your house.
Plus, some types of revolving debt, like rewards cards, allow you to earn airline miles, points and/or cashback.
However, the open-endedness of revolving credit can make it easier to borrow more than you need.
Also, unlike installment debt, revolving debt is included in your credit utilization ratio. Credit utilization ratio measures how much credit you have available compared to how much you are currently using.
If your credit utilization climbs too high, you can expect a dip in your credit score. Credit utilization ratio is included as a factor in the “amounts owed” category of a FICO Score. Amounts owed make up 30% of a FICO Score.
Revolving debt vs. installment debt
The opposite of revolving debt is installment debt (or installment loans).
Installment loans are provided via a lump sum of money rather than a revolving credit line over time. Unlike revolving credit, installment loans typically have fixed interest rates and fixed monthly payments. That means you’ll know how much your payment will be each month.
Installment debt also comes with set loan terms that give you a clear end date to payoff. A loan term is the length of time you have to pay your loan in full.
Some popular forms of installment debt include auto loans and mortgages. Auto loans (in most cases) and mortgages are backed by the car or the property being purchased with the loan. The loan funds must also be used to buy the car or the home.
Personal loans, on the other hand, can be used for almost anything, like big purchases and emergencies.
| Feature | Revolving credit (revolving debt) | Installment debt (installment loan) |
|---|---|---|
| How you receive funds | Borrow as needed up to a limit | Receive a lump sum up front |
| Repayment structure | Minimum monthly payments vary based on how much you borrow | Payment stays the same each month |
| Payoff date | No fixed payoff date (generally) | Set repayment date (36-month term, for example) |
| Interest | Usually variable | Usually fixed |
| May be best for | Ongoing access to cash, short-term spending that you can pay back quickly and/or earning rewards on certain credit cards | A big one-time expense that you need months to years to pay off |
| Examples | Credit cards, HELOCs, PLOCS | Personal loans, auto loans, mortgages |
Revolving debt vs. installment debt: rates
If you’re facing a large, unexpected purchase and you’re thinking about putting it on your credit card, you may want to think again. Unless you can pay the card off before the end of your billing cycle, interest is going to start accumulating and compounding.
Instead, consider a personal loan. Because personal loans are installment debt, you’ll know how much interest you’ll pay upfront, and it doesn’t compound. Personal loans also tend to have lower rates than cards if you have good credit.
Borrowers with good or better credit scores typically get personal loan APRs below the average credit card interest rate, which tends to hover around 24%, according to LendingTree data.
| Credit tier | Average APR |
|---|---|
| Excellent (800 and above) | 11.77% |
| Very good (740-799) | 14.74% |
| Good (670-739) | 22.72% |
| Fair (580-669) | 30.17% |
| Poor (under 580) | 32.19% |
Frequently asked questions
Generally, the ideal credit utilization ratio is below 30%, but not necessarily zero. A 0% credit utilization ratio doesn’t prove to lenders that you can borrow responsibly, since it means you aren’t using your revolving credit.
Find your credit utilization ratio by dividing what you currently owe in revolving credit by your credit limit, then multiplying it by 100 to get a percentage. You can improve your credit utilization ratio by responsibly managing your debt.
Carrying a large balance of revolving credit, such as on a credit card, can be harmful to your financial health. High interest can accumulate quickly and your credit utilization ratio could be negatively impacted, leading to a potential drop in your credit score.
However, as long as you pay off your balance frequently, credit cards can help build credit and allow you to earn points and incentives, depending on the card.
Revolving accounts can hurt or help your credit — it depends on how well you manage them.
When you open a revolving credit account, your lender will run a hard credit pull, which can cause your credit score to go down by a few points. Also, using a lot of your available credit can drive up your credit utilization, leading to a potentially lower score.
However, payment history makes up most of your FICO Score (35%). Making your payments on time can help you improve your credit. Try to make more than the minimum amount due to avoid accumulating too much interest.
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