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What is a Revolving Credit Account?

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When you need to pay for something but don’t have the money or don’t want to use the cash or funds you have, you might consider using revolving credit. What is revolving credit? Revolving credit allows you to spend up to a certain amount of money on credit and either pay off that debt in full or carry a balance and incur interest. Taking on revolving debt can help you pay for expenses like remodeling your home before knowing the total costs.

Revolving credit accounts can include:

Learn more about each type of revolving credit account so you can better decide which borrowing option is right for you.

Types of Revolving Credit Accounts

Depending on the payment or purchase you’re making, one type of revolving credit account might work better for you than another. Learn the differences among revolving credit accounts so you can decide what works for you. Here are four kinds of revolving credit accounts:

Credit Cards Issued by a Bank or Credit Union

A credit card account is a revolving credit account. You’re approved to borrow up to a certain limit, which you can access through the card that is issued to you. The interest rate on credit cards is generally variable and based on market rates, as well as your credit history. With most credit cards, the minimum payment is a percentage of what you owe, but if you only pay the minimum amount it can take years to pay this off. Credit cards typically have fees for late payments.

Credit Cards Issued by a Retail Store

A store credit card is similar to a credit card issued by a bank. It will have a set limit you can borrow, and you’ll be required to make minimum monthly payments. The main difference is that you can typically only use the card at the store that issued it to you, such as a department store. Some stores offer discounts or rewards if you use the store card to make certain types of purchases. A store credit card might be easier to qualify for than a regular credit card if you don’t have good credit.

Learn: 6 Pros and Cons of Store Credit Cards

Credit Cards Issued by an Oil Company

Credit cards issued by an oil company, or gas cards, are similar to store credit cards, in that you can probably only use these credit cards at one gas station chain. The limit you can borrow will be set, and you will be required to make minimum monthly payments. Gas stations might offer a discount on gasoline if you pay with the store’s gas card.

Home Equity Lines of Credit

A home equity line of credit is a revolving loan. The bank will approve you for a set amount to borrow and give you instructions on how to access the line of credit. The interest rate on a HELOC is usually variable. Like with a credit card, as you repay the balance, the available amount of credit is replenished. HELOCs usually have a draw period, often seven to 10 years, and a repayment period of up to 20 to 30 years. HELOCs might have application fees, annual fees, late payment fees and prepayment fees.

Find Out: 10 Things You Should Never Put on a Credit Card

Revolving Credit vs. Installment Credit

An installment loan, such as a personal or student loan, gives you one lump sum that is paid back in set monthly payments. Once you pay off an installment loan, you’re finished with the loan. With a revolving line of credit, you can pay off the amount spent and then access the money again as long as the loan is still open.

For credit scoring models, paying off debts in full and on time will improve your credit score. Credit agencies also compare the amount of revolving credit you have open at one time with the amount owed. The lower this ratio, the better your credit score.

Related: Choose the Right Credit Card for You