What is revolving credit?

Did you know there are two main types of credit? They're called revolving credit and non-revolving credit. We explain the differences, as well as how revolving credit can be used to improve your credit score, so you can manage your money better!

How does revolving credit work?

Revolving credit (or rolling credit) is like a money jar. You can borrow from it, repay, and borrow again without needing a new application. The great thing about revolving credit is that you decide how much to pay back each month.

With revolving credit accounts:

• You control your spending
• You choose how much to pay back each month
• You can use the same credit over and over again

Credit cards are the most common type of revolving credit. You have a limit on how much you can spend, but you decide when to use it and how much to pay back each month.

Another example is an authorised overdraft on your bank account. An overdraft lets you borrow a little extra money from your bank when you need it, providing you with flexibility in when you can pay it back.

As with most forms of borrowing, you are charged interest on the money you owe, so it’s best to only spend what you need, and pay it back as soon as you can.

How does non-revolving credit work?

Non-revolving credit works differently. When you get non-revolving credit, you:

• Borrow a set amount of money all at once
• Make the same payment every month
• Know exactly when you'll finish paying it back

Loans are a perfect example of non-revolving credit. When you get a loan, you know from the start how much interest is charged, as well as what you'll pay each month and for how long.

How revolving credit affects your credit score

Your credit score is like a report card that shows how good you are with money. Revolving credit can help your credit score if you use it wisely!

Here's how to make revolving credit work for you:

• Try to use less than 30% of your total credit limit
• Pay your bills on time every month
• Don't max out your credit cards

Did you know? If you only use about 30% of your credit limit, this helps to improve your credit score! But, if you use more than 90% of your limit, your score could be lowered.

This is because the more of your credit you use (credit utilisation), the more you suggest to lenders that you are reliant on credit, and could therefore be seen as a riskier borrower.

Benefits of revolving credit

Revolving credit has some great benefits:

✅ You can boost your credit score by using it responsibly and making payments on time.

✅ You have more flexibility to decide how much to pay back each month based on what you can afford.

✅ You can reuse your credit over and over without applying for a new loan.

Disadvantages of revolving credit

Of course, revolving credit comes with some challenges too:

❌ It's easier to spend too much when you have a big credit limit.

❌ It can be harder to stick to a budget without fixed monthly payments.

❌ You might pay more interest if you only make minimum payments.

How to be smart with your revolving credit

Here are some simple tips to help you manage revolving credit:

1. Set up alerts from your bank to tell you when you're spending a lot.
2. Try to pay your full balance each month to avoid interest charges.
3. Keep track of your spending so you don't use too much of your available credit.
4. Check your credit report regularly to see how your revolving credit accounts affect your score.

Remember, revolving credit can be a helpful tool when you use it wisely!