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A revolving
line of credit is a commitment from a lender
to make available to a borrower a certain amount
of credit. As each purchase or advance is made by
the borrower, the amount is debited from the
amount available. As it’s repaid that amount
becomes available again. A
credit card is a good example of the way a
revolving line of credit works.
A revolving line of credit likely is so named
because the available credit is continually
fluctuating upwards and down. When funds are used
(or borrowed) available credit decreases. When
funds are repaid, available credit increases up to
the maximum.
Those that issue revolving lines of credit do so
with the intention of making a profit. The profit
each makes is derived primarily from the
interest rate charged for using the credit.
Depending on the issuer and also on the borrower’s
credit history, the interest rate charged will
vary and it can fluctuate according to the terms
outlined by the issuer.
Unlike an installment loan (such as a mortgage or
car loan), when you make purchases against a
revolving line of credit, you won’t always have to
repay the same amount each month. You’ll have a
minimum amount due each month, but if you have the
funds, you can make as large a payment as you
want. You can even repay the balance in full.
Any amount paid over and above the amount that
you’re charged as interest goes directly towards
paying down the principle. Ideally, that should be
your goal. By doing so, you will pay less in
interest over time and you’ll increase your
available credit.
Your credit history has a lot to do with the terms
an issuer will offer on a revolving line of
credit. If you have proven that you can manage
your finances – you don’t overextend yourself and
you always make your payments on time – you’ll
find that over time, the limit on your revolving
line of credit may increase. You may also be able
to negotiate more favorable terms such as
switching from a
variable rate of interest to a
fixed rate.
Failure to manage your finances will have
repercussions, though. The details of each of your
revolving line of credit-type accounts appear on
your credit history so if you make payments late
or if your balance to available credit ratio is
too high, your
credit score will likely take a tumble.
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