What is revolving credit and how does it work?

Anytime you use your credit card, you’re using revolving credit. But revolving credit isn’t limited to credit cards. Personal lines of credit (PLOCs), home equity lines of credit (HELOCs) and charge cards are also forms of revolving credit.

Learn more about how revolving credit works, what a revolving balance is and how to stay in control of your revolving credit accounts.

Key takeaways

• Revolving credit accounts are open-ended debt. They don’t have an expiration date and generally stay open as long as the account is in good standing.
• As money is borrowed from a revolving account, the amount of available credit goes down. As the debt is repaid, the available credit goes back up.
• Credit cards, PLOCs and HELOCs are examples of revolving credit.
• Revolving credit is different from installment credit, which can’t be used on a recurring basis. Mortgages and auto loans are examples of installment credit accounts.

Revolving credit refers to an open-ended credit account. The credit can be used and then paid down repeatedly as long as the account remains open and in good standing. 

Revolving credit accounts, like credit cards, typically come with a preset credit limit. This is the maximum amount you’re allowed to charge to the account. 

Revolving credit accounts don’t have end dates, which is why they’re known as open-ended accounts. You can use the funds in the account and pay your debt down again and again.

As you make purchases, your available credit will decrease. But every time you make a payment, your available credit will go back up. Keep in mind that fees and interest could also affect the available credit.

With a revolving credit account, you’ll generally be required to make a minimum payment every month. This minimum payment will likely vary based on your statement balance. 

If you don’t fully pay off your revolving credit balance at the end of each billing cycle, the unpaid portion carries over to the next month. That’s your revolving balance.

When you carry a revolving balance, you may be charged interest. As the Consumer Financial Protection Bureau (CFPB) explains, “A credit card’s interest rate is the price you pay for borrowing money.” And the higher your revolving balance, the more interest you’ll typically owe. 

Paying off your balance every month can help you avoid or limit interest payments on a revolving credit account.

Common types of revolving credit accounts include credit cards, PLOCs and HELOCs. Take a closer look at each.

• Credit cards: Credit cards can be used to make everyday purchases or to pay for unexpected expenses. Some come with rewards and benefits for an added advantage.
• PLOCs: A PLOC is similar to a credit card. But it’s not linked to a physical card. Instead, you might get the funds in the form of a check or a direct deposit into your bank account. 
• HELOCs: According to the CFPB, a HELOC is an open-ended credit account that lets you borrow money against the value of your home. You can borrow and repay the money multiple times against a preset credit limit. But this isn’t the same as a home equity loan, which is typically a lump sum of money you borrow once with a fixed interest rate.

Like other types of credit accounts, revolving credit can hurt or help your credit. The way a revolving account impacts your credit largely depends on how you manage your account. 

Here are some of the credit factors used to calculate credit scores: 

• Credit age: Credit age can be important because it shows how long your accounts have been open. As explained by the CFPB, “Credit scores are based on experience over time. The more experience your credit report shows with paying your loans on time, the more information there is to determine whether you are a good credit recipient.”
• Credit mix: Your credit mix consists of the different types of credit accounts you have, including revolving and nonrevolving. It indicates your experience managing different types of credit. 
• Payment history: Payment history shows how reliable you’ve been in making payments on your credit accounts across time. Making consistent on-time payments to your revolving credit account can demonstrate good credit behavior and could improve your scores. 
• Credit utilization ratio: Your credit utilization ratio is how much available credit you have compared to the amount of credit you’re using. According to the CFPB, you can calculate your credit utilization ratio by dividing your total balances across all of your accounts by your total available credit. The CFPB recommends keeping your utilization below 30% of your available credit.

You’ve read that credit cards, PLOCs and HELOCs are examples of revolving credit accounts. Installment loans such as auto loans, mortgages and student loans are examples of nonrevolving credit accounts. 

A major difference between the two types of accounts is whether each can be used on a recurring basis. Other differences include: 

• Open-ended vs. close-ended structure: With open-ended revolving accounts, you can use the line of credit repeatedly—up to a certain credit limit—for as long as the account is open. But with closed-ended installment loans, you borrow the amount once and the account is closed once your balance is paid off. 
• Interest rates: Installment loans may have lower interest rates than revolving credit accounts. That’s because installment loans like mortgages are typically backed by collateral while revolving credit accounts aren’t. But keep in mind that it might be possible to avoid interest charges on revolving credit if the balance is paid off every month.
• Payments: Installment loan accounts are generally repaid in regular, equal payments—or installments—over a specific period of time. And in some cases, there might be a prepayment penalty for paying off the loan ahead of schedule. But on a revolving credit balance, you may only have to make the minimum monthly payment—plus applicable interest and fees.
• Flexibility: Revolving credit might give you more flexibility compared to some installment loans. A credit card, for example, can be used for a wide variety of purchases. But many installment loan agreements are for a specific purpose, such as a car loan or mortgage. 

The specifics of how a revolving or nonrevolving credit account works can vary based on the lender and other factors. It’s always a good idea to make sure you understand the terms of any credit agreement you enter into.

These simple steps could help you pay down a revolving balance and might even help your credit score. 

1. Spend responsibly. Spending responsibly can be a good idea whether or not you carry a revolving balance from month to month. When you do have a balance, make sure to keep in mind what you already owe when you think about spending more. 
2. Pay more than the minimum. Whenever possible, pay more than the minimum amount due. This could help you pay off your balance quicker and possibly pay less in interest. 
3. Consider paying off higher-interest accounts first. To pay less in interest overall, you might consider focusing on paying down higher-interest accounts first. This is known as the debt avalanche method. 
4. Make all payments on time. On-time payments can help you avoid late fees and may even help boost your credit scores when done consistently.
5. Monitor your credit score. You can get free copies of your credit reports from AnnualCreditReport.com. You can also monitor your credit score with CreditWise from Capital One. It’s free, and using it won’t impact your credit. CreditWise can alert you to changes on your TransUnion® and Experian® credit reports. And you can use it to access your TransUnion credit report and VantageScore 3.0 credit score anytime.

Review common questions about revolving credit to help determine whether it’s right for you. 

Using revolving credit can make it easy to access funds when you need them, up to your credit limit. And when you consistently manage your revolving credit accounts responsibly, you might even be able to improve your credit scores. 

Thinking of opening a revolving credit account? Compare credit cards from Capital One and find which card is right for you.