What Is Revolving Credit?
5 Min Read | Last updated: November 30, 2023
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Understanding what revolving credit is and how it works can help you manage personal finances, especially cash flow, with more flexibility.
At-A-Glance
- With revolving credit, you gain flexibility in your personal finances because you decide how much, and when, you borrow and spend as long as you stay within a preset credit limit.
- Credit cards and lines of credit are the main forms of revolving credit.
If “revolving credit” is one of those financial terms that makes your head spin, it shouldn’t. Chances are, you’ve already used it more than once: It’s how credit cards work, after all.
Credit cards are one of the most well-known type of revolving credit. But banks also offer home equity lines of credit and personal lines of credit based on revolving credit. This article describes how revolving credit works for each of these financial tools.
Understanding Revolving Credit: Credit Cards
Basically, a credit card company agrees to let you borrow money up to a certain limit, and you spend down that limit when you buy something with your card – for more detail, read “How to Increase Your Credit Limit.” Every month, you hit the reset button if you pay your balance in full. And then you’re back where you started: able to borrow up to your limit again. If you don’t replace what you’ve spent, you carry an unpaid balance into the next month – known as “revolving the balance” – and begin paying interest on this debt.
Credit cards serve different purposes at different times, the U.S. Federal Reserve has found. “For people who pay their balances off each month, credit cards are mainly a form of payment convenience and can be thought of more or less the same as using cash,” it stated in a report. “For those who carry a balance, however, use of the card represents borrowing and carries a cost in the interest payment and any fees that are incurred.”1
While paying your credit card in full every month is a best practice, not all credit card holders pay off their entire balance monthly. When not paid in full, credit card balances that carry over are charged an interest rate. The average interest rate on balances stood at 20.7% as of May 2023.2
Understanding Revolving Credit: Lines of Credit
The big difference between home equity and personal lines of credit is right there in their names. The first requires you to put up your home as collateral, and the second usually requires no collateral. Both set a credit limit against which you can borrow as needs arise. And both are often used to manage cash flow, though home equity lines are often used for major home improvements, too.
Home equity line of credit:
As of mid 2023, the average interest rate on a home equity line of credit was just over 9% with rates as low as 7%, depending on the borrower’s credit profile and other factors.3 Often, you can make interest-only payments for a period of time and then begin paying the principal plus interest. Online calculators can help you work out the costs of a home equity line of credit.
Personal line of credit:
While you don’t typically need to put up collateral for a personal line of credit, you do need a solid credit profile. With an average interest rate of around 13.5% for good or excellent credit borrowers as of mid 2023, personal lines of credit are usually more expensive than home equity lines of credit but less costly than some other forms of borrowing, such as cash advances on credit cards.4
To avoid confusion between personal loans (installment loans) and personal lines of credit (revolving credit), there are a couple distinctions to remember. Personal loans provide you with money in one lump sum, at a lower interest rate, and then require fixed, regular payments. Personal lines of credit tend to have higher interest rates than personal loans, but you’re only paying interest on the amount of money you actually borrow against your credit limit. And the payment plan resembles the one used for credit card bills, including monthly minimum payments based only on what you’ve borrowed.
What Is the Difference Between Revolving Credit and Installment Loans?
The other way people mainly borrow money – that doesn’t “revolve” – is with installment loans, such as mortgages, car loans, student loans, and personal loans. In the table below, we detail the differences between revolving credit and installment loans. Primarily, revolving credit provides more flexible access to funds as you need them, with monthly payments that vary as your level of borrowing changes and as national interest rates rise and fall. Installment loans are primarily taken out for big-ticket items and, as their name implies, usually repaid in regular monthly sums at fixed interest rates.
| Revolving Credit Vs. Installment Loans | |
|---|---|
| Credit | Loans |
| Mainly used for making small- to medium-sized purchases and managing cash flow | Mainly for big purchases, such as a home, car, or college tuition |
| Varying monthly payments | Typically will have the same payment every month |
| Typically higher interest rates | Comparatively lower interest rates |
| Usually easier to apply and qualify | Usually more paperwork and harder to qualify |
Revolving Credit in America, By the Numbers
Revolving credit is a very big deal, as you can see in these statistics from various Fed reports:
- Americans held about $1.35 trillion in revolving debt in mid 2023 – most of it credit card debt.5
- The larger portion of total U.S. household debt, which stands at over $17 trillion, is in installment loans, which include mortgages, student loans, and auto loans.6
- The second largest form of revolving credit, the home equity line of credit, was used by homeowners to borrow about $340 billion in mid 2023.7
- Other personal lines of credit represent a smaller piece of the revolving credit pie.
Frequently Asked Questions
A credit utilization score above 30% is considered high, though the specific amount depends on available credit, income, and personal spending habits.
Paying off monthly balances in full and maintaining a low credit utilization ratio can help improve a credit score. Conversely, carrying balances over every month and maintaining a high credit utilization ratio can negatively impact scores.
When you should use revolving credit is entirely dependent on your situation. For example, revolving credit from a Home Equity Line of Credit (HELOC) can help cover home renovations or repairs, which can be an effective use of revolving credit.
The Takeaway
Revolving credit is a staple of personal finance that provides cash flow flexibility. Two main types of revolving credit are credit cards – used typically for everyday purchases – and lines of credit – used more often for cash flow management and home improvement. Understanding revolving credit and how it works can help you decide on the best financial tool for your needs.
1,2 “Consumer Credit – G.19,” U.S. Federal Reserve
3 “Home Equity Line of Credit (HELOC) Rates,” Bankrate
4 “What’s the average personal loan interest rate?,” Bankrate
5 “Total Household Debt Reaches $17.06 Trillion in Q2 2023; Credit Card Debt Exceeds $1 Trillion,” Federal Reserve Bank of New York
6 Ibid.
7 “Household Debt and Credit Report(Q2 2023),” U.S. Federal Reserve
Karen Lynch is a journalist who has covered global business, technology, finance, and related public policy issues for more than 30 years.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
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