What is Revolving Credit and How Does it Work?

Discover the ins and outs of revolving credit balance, utilization and interests

Many of us look at a new credit card with the same thought in mind: “I’ll pay the balance in full every month.” But of course, real life can get in the way, and sometimes a full payment isn’t possible. Cars break down. Doctors’ appointments come up. To stay in control of your finances instead of being controlled by them, it’s important to understand what carrying a balance means.

What Is a Revolving Balance?

Credit cards differ from other loans in that there’s no need to reapply when you need more money. Once you’re approved for a credit card, you’re able to make charges up to your credit limit, which includes fees and interest. Some people are able to pay their balance in full every month. But if you’re unable to pay off the full balance, that unpaid portion carries over from month to month. That’s called a revolving balance.

How Does Revolving Credit Work?

With revolving credit, your bank allows you to borrow money up until a certain limit. Every time you make a purchase, that amount is subtracted from your total credit limit. And every time you make a payment, your credit limit goes back up, allowing you to borrow more.

Revolving credit has no end date; you only need to pay the minimum payments on time every month. Because the minimum payment is calculated based on what is owed, the payment can vary from month to month. 

Discover the ins and outs of revolving credit balance, utilization and interests. 

1. Interest Payments

If you have a revolving balance, you’ll pay interest monthly—the price your credit card company charges for using their money. The bigger your balance, the more you’ll pay in interest. So, it’s best to pay what you can and keep interest payments as low as possible.

You could avoid interest payments if you signed up for a card with an introductory offer, such as 0% interest for the first 12 months. After the 12 months are up and interest begins to accrue, it’s best to pay off the card with the highest interest rate first to save money. You can also avoid interest payments and a revolving balance by paying your balance in full every month.

2. Revolving Credit and Credit Score

The amount of credit you have versus the amount of credit you use helps determine your credit score using your credit utilization ratio: that is, the amount you owe compared with your available credit. Using less than 30% of your available credit is a good goal. If you do have a balance, try to make regular payments to keep it below your credit limit.

How to Stay in Control of Revolving Credit

A few simple steps can help you pay down a revolving balance and might even help your credit score moving forward.

  • Use a budget: One way to pay your revolving balance down is to treat it like a “fixed” expense in your budget until it’s paid off.
  • Spend responsibly: It’s a good tip whether you carry a revolving balance or not. If you do have a balance, consider what you owe as you plan what you’re spending.
  • Pay more than the minimum: Whenever possible, pay more than the minimum payment. It may help you lower your balance quicker.
  • Pay off highest interest rates first: This debt is costing you the most money, so it’s best to pay off first. Then move on to lower interest cards.
  • Make all payments on time: This not only ensures your revolving balance is decreasing over time but will improve your credit score, too.
  • Know your credit score: An app like CreditWise® from Capital One allows you to access your TransUnion® credit score as often as you want and to see your updated score weekly. It also sends email and push notifications when your TransUnion credit report changes.

Revolving credit may be a little difficult to understand at first, but you can use it to your advantage. Paying your bills on time, keeping a low credit utilization ratio and staying up to date with your credit score by using CreditWise® can all help you maintain a positive credit score. 

We hope that you found this helpful. Our content is not intended to provide legal, investment, or financial advice or to indicate the Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.


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