What is a Revolving Line of Credit?
A revolving line of credit is credit extended to a customer that allows the borrower to withdraw funds up to the approved amount. For example, if a borrower is granted a $1,000 line of credit and uses $600 of the credit available, he or she still has a remaining balance $400 of credit available to be borrowed. As the $600 is repaid, the full $1,000 becomes available to be borrowed. The customer can borrow the full amount or can borrow amounts less than the full amount of the line of credit. The borrower pays interest only on the amount borrowed, not the full amount available to the borrower.
There are different types of revolving lines of credit available:
Purchase Credit Cards and Merchant Credit Cards
A common type of revolving line of credit that most people are familiar with are credit cards. When a borrower is approved for a credit card, they are approved for a set amount of credit available to them. The borrower can borrow funds for purchases up to that maximum amount. Merchant lines of credit are similar to a credit card; however, these types of cards are usually limited to being used only at the business that issued the credit. For both cards, interest is paid for any balance that is not paid in full for purchases made during that statement period by the statement due date. Borrowers are obligated to make minimum payments established in the terms of the credit card agreement. Credit cards allow flexibility for making purchases, but they are not as convenient when cash is needed. Most credit cards only allow a certain percentage of available credit to be used for a cash advance and typically charge a higher rate of interest than that charged for purchases. For merchant credit cards, accessing cash is frequently not an option. Merchant credit cards typically have a higher interest rate than purchase credit cards, but they may offer special discounts and other promotional offers to their cardholders.
Home Equity Line of Credit
Another type of a revolving line of credit is a home equity loan. In this situation, the borrower is granted a line of credit based on the equity they have in their home. The borrower can then borrow funds up to the approved home equity line of credit amount. This type of line of credit is typically used for home repairs and home renovation projects. Interest is paid for any borrowed balance. The borrower makes payments based on terms established in their loan agreement. Borrowers should make sure they understand those terms, as sometimes home equity lines of credit may include small monthly payments, but require that the balance be paid in full at the end of an established term. If borrowers do not plan accordingly, they may be subject to a large balloon payment due all at once by the end of their term. Home equity lines of credit are not available to those who do not have equity built in their homes.
Personal Line of Credit:
Personal lines of credit are another option available to consumers. Like the other line of credit types mentioned above, a personal line of credit also allows borrowers to withdraw funds up to a certain limit. For a personal line of credit, home equity is not needed and usually a borrower is not limited to how they use their line of credit funds. Personal lines of credit can be secured (the borrower puts up an asset as collateral) or unsecured (no collateral is required). Secured lines of credit typically have higher limits and lower interest rates than those that are unsecured.
Revolving lines of credit can provide borrowers with access to funds when needed. There are several different types available to meet consumers’ needs, including credit cards, home equity loans and personal lines of credit. Regardless of the type of revolving line of credit chosen, borrowers should ensure they are borrowing responsibly – borrowers should understand the terms of the loan and ensure that they can abide by repayment agreements before signing any lending agreements.
The content on this site is for informational purposes only and is not professional financial advice. Ladder Credit does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for their own situation.