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What is a revolving credit account?

Revolving credit is a type of credit where the consumer’s balance and monthly payment fluctuate. This type of credit account (or line of credit) has a predetermined credit/spending limit.

A revolving account doesn’t close just because the account has a zero balance. It remains open until the lender or the consumer chooses to close it. This is why a revolving credit account is also known as an "open-ended account."

Credit cards are the primary type of revolving credit. For example, if Amy has a Visa card issued by her bank with a $10,000 credit limit, she can go out and charge up to $10,000 worth of products or services. If Amy purchased $1,000 worth of tires for her car using her Visa card, she would receive a bill for that amount at the end of her billing cycle.

The bank gives Amy a couple of different repayment options. She can write them a check for $1,000; she can pay the minimum (in this case it’s $38); or she can pay any amount in between the two. If Amy chooses to pay $300, she is “revolving” the other $700 to the next month, which is perfectly fine. However, by doing so she will have to pay interest on that $700.

The following month, Amy doesn’t use her Visa card and she gets a bill for $805. The first $700 is the amount she revolved and the extra $105 is the interest (in this case, she was charged 15 percent interest). Now Amy has another choice. She can write her bank a check for $805 and pay the balance in full or she can pay the minimum monthly payment again (now $34). Or, she can choose to pay any amount in between. Amy chooses to pay $500 and carry over the unpaid $305 to the next month.

The next month Amy doesn’t use her Visa card once again, but she gets a bill in the mail for $350.75 -- the extra $45.75 is the interest. Now do you understand how credit card companies make money? Even though Amy is paying on time, she is paying interest each month she revolves a balance.

Other examples of revolving credit are home equity lines of credit (HELOCs), retail store credit cards, gas station cards, and some forms of American Express cards.

Not sure where you stand credit-wise? Check your credit reports and scores online today!

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