What Is a Revolving Account and How Do They Work?

A revolving account provides a borrower with a maximum credit limit, allowing for flexible and repeated borrowing within that amount. This account remains open indefinitely, as long as the borrower maintains good standing. Funds can be borrowed, repaid, and borrowed again.

Key Features of Revolving Accounts

A revolving account’s credit limit represents the maximum amount a lender permits you to spend. This limit is determined by factors such as your credit score, income, and repayment history. Higher limits are offered to those deemed lower risk. When a portion of the credit limit is used, available credit decreases but replenishes as payments are made.

Revolving accounts require a minimum payment on the outstanding balance, which must be made periodically to avoid penalties and maintain good standing. This payment is typically calculated as a small percentage of the total credit balance. Making only the minimum payment means it will take longer to pay off the balance and will result in higher interest expenses over time.

Interest charges accrue on any outstanding balance not paid in full by the due date. These rates can be variable and are higher than other loan types. Interest can be avoided on purchases if the full statement balance is paid by the due date each month.

The revolving credit line allows for continuous borrowing, repayment, and re-borrowing of funds within the established credit limit. This means the outstanding balance fluctuates based on purchases, payments, and interest accumulation.

Common Types of Revolving Accounts

Credit cards are the most widely recognized form of revolving accounts, offering a convenient way to make purchases or cover larger expenses. They provide access to an ongoing line of credit that can be used repeatedly up to a set limit. Paying off the balance in full each month helps avoid interest charges and maintains a healthy credit utilization ratio.

Personal lines of credit function similarly to credit cards, allowing individuals to draw money up to a certain limit for various personal needs. These are often unsecured, meaning they are not backed by collateral, and have variable interest rates. Some personal lines of credit may have a specific “draw period” during which funds can be accessed, followed by a repayment period.

Home Equity Lines of Credit (HELOCs) are another common type of revolving account, secured by the equity in a homeowner’s property. These allow homeowners to borrow against their home’s value. HELOCs feature variable interest rates and commonly have a draw period, during which borrowers can access funds, followed by a repayment period.

Revolving Accounts Versus Installment Loans

Revolving accounts differ from installment loans in their payment structure. Revolving credit allows for variable minimum payments based on the outstanding balance, offering flexibility in how much is paid each month. Conversely, installment loans, such as mortgages or auto loans, involve fixed payments over a predetermined period until the loan is fully repaid.

Installment loans disburse a lump sum upfront. Once that amount is borrowed, no additional funds can be accessed from that specific loan. Revolving accounts provide an ongoing, reusable credit line; as funds are repaid, the available credit is replenished and can be borrowed again. This allows for continuous access to funds up to the credit limit.

Installment loans have a fixed end date by which the entire loan must be repaid, making the repayment schedule predictable. Revolving accounts are open-ended and do not have a specified maturity date, remaining active as long as the account is in good standing.

Interest calculation methods vary between the two. For installment loans, interest is calculated on the initial principal amount borrowed. Revolving accounts charge interest only on the outstanding balance carried over from one billing cycle to the next, not on the entire credit limit. This means interest costs can fluctuate monthly with the balance.