What is revolving credit?

When it comes to borrowing, there are two different kinds of credit accounts; revolving and non-revolving. We take a look at how they compare.

If you're trying to improve your credit rating, how you handle your accounts is really important. But did you know that the type of credit can also have an effect on your report?

In particular, whether your credit account is ‘revolving’ or not can have an impact on how lenders view you. We take a good look at what revolving credit means and how it can affect your credit score.

What does it mean to have revolving credit?

Put simply, revolving credit is a credit account where you control your repayments. With revolving credit, the amount you repay each month is up to you; whether you want to clear your balance in full, pay off just the minimum amount or somewhere in between, it’s entirely down to you.

With non-revolving credit, on the other hand, your repayments are fixed from the beginning. From the get-go, you’ll know how long you’ll be paying off your debts for and exactly how much you’ll repay each month. This will usually be agreed between you and your bank before you borrow the money.

What is a revolving line of credit?

An example of revolving debt could be a credit card. This is because, although you’ll have a limit, you’ll be in charge of the amount you spend and repay every month. One month you might decide to put a bigger purchase on your credit card; other months, you might choose not to use it at all.

Another example of revolving credit could be a flexible overdraft, where you adjust the limit of your overdraft each month. Again, you’ll likely have a maximum limit, but the amount you spend is entirely up to you.

What are considered non-revolving accounts?

A non-revolving credit account could be a loan. If you take out a loan, you’ll know upfront the amount you need to repay each month, and for how long.

If you don’t keep up with these fixed costs, you could risk damaging your credit score and could be hit with a late repayment charge. With loans, the cost is often automatically taken from your account each month through Direct Debit, so there’s less risk of you forgetting to make a payment.

How do you calculate revolving credit?

With revolving credit, you’ll see what the annual interest rate is (the APR). This figure is based on what it’d cost you to spread the cost of a purchase over an entire year. But how can you calculate the cost of interest for your monthly spending?

Well, it boils down to a simple sum. Multiply your balance by your interest rate and multiply this by the number of days in the month. Divide this by 365 (the amount of days in a year) and there you go!

Does revolving credit hurt my credit score?

Revolving credit can be a good thing for your credit score. Because you have the flexibility to use your limit however you like and pay on time every month, you can show lenders that you’re responsible. Experian say that you could improve your credit score by a huge 90 points if you spend around 30% of your overall limit.

On the other hand, if you end up splurging and spending lots of your revolving credit, you could hurt your credit score. Experian have said your credit score could drop by 50 points if you use up over 90% of your limit.

It all boils down to how you use your revolving credit and how you manage the repayments. If you don’t use up lots of your limit, revolving credit can boost your credit score.

The advantages of revolving credit

Compared to non-revolving credit like loans, there are a few perks that come with using revolving credit:

You can improve your credit score

As you have the power to use your balance sensibly and make your payments in full, you can use revolving credit to boost your credit score. 

More flexibility

With revolving credit, you can choose to pay off an amount that suits your circumstances at the time. 

The disadvantages of revolving credit

On the other hand, there are certain downsides that could occur with revolving credit:

More temptation to overspend

If you have a large credit limit, there’s little stopping you from spending all of it. This could start to hurt your credit score and it could be an expensive way of borrowing as you’ll pay more in interest.

It can be harder to budget

Without a fixed monthly cost, it can be harder to stick to only spending a specific amount of your credit. This can make it a little trickier to stick to your monthly budget.

How to manage revolving credit

Having revolving credit (like a credit card) on your report can help improve your credit score – providing you use it responsibly.

To help keep your revolving credit under check, it’s worth following these top tips:

Set up spending alerts

If your bank allows you to, set up email or text alerts which let you know you’re reaching your personalised spending limit.

Try to pay off your balance in full

This can show that you’re handling your revolving credit responsibly and could boost your credit score.