5 Tips to Manage Revolving Credit

If you’ve ever made a purchase with a credit card, you’ve used revolving credit. Using revolving credit responsibly and making the required monthly payments can provide a boost to your credit score and keep you in good financial standing, but it’s easier said than done. Learn about the key elements of revolving credit to manage it and get the most out of this valuable financial tool.

What is revolving credit?

Revolving credit, or a revolving line of credit, allows you to borrow money against an established credit limit, and then repay it over time, with the option to borrow more as you repay your balance. In other words, as long as you haven’t hit your credit limit, you can keep borrowing. Revolving credit gives you the ability to access your credit limit when you need it..

Benefits of Revolving Credit 

Incorporating revolving credit into your financial plan can be highly beneficial when managed properly. It can:

• Protect your savings: Hit with an emergency expense? Revolving credit gives you access to credit without having to deplete your savings to pay for the expense.
• Manage your cash flow: Smooth out fluctuations in your income and expenses. For example, if you have an unexpected expense but you don’t get paid until next week, you can use your credit line to cover it and repay it when you have the funds. Just keep in mind you may accrue interest until you repay it.
• Potentially improve credit score: Responsible use of revolving credit can positively impact your credit score, especially if you keep your credit utilization low and make on-time, minimum required payments.
• Help you maintain financial flexibility: Make larger purchases and pay them off over time, with interest, with revolving credit and still be able to pay your monthly expenses as usual.

Major Features of Revolving Credit

There are a few defining features of revolving credit products. These include:

• Credit limit: The maximum amount you can borrow at any time before repaying to reopen your available to spend. Your credit history, income, and other factors can contribute to your credit limit.
• Flexible borrowing: You can spend up to your credit limit, repay, and continue borrowing, unlike most typical installment loans that require you to re-apply after you’ve reached the end of a fixed term.
• Variable payments: Revolving credit payments are based on the amount you borrowed and the interest rate, which can fluctuate with market rates.
• Interest charges: Interest is typically charged on any balance, and your interest rate can vary widely based on factors like your creditworthiness and the lender's terms.
• Secured or unsecured: There are two types of revolving credit: secured and unsecured. Unsecured revolving credit means there is no collateral backing the line of credit; secured revolving credit means that the line of credit is backed by collateral. 

Examples of Revolving Credit 

Some common examples of revolving credit are credit cards, home equity lines of credit (HELOCs), and personal lines of credit. 

• Credit card: You’re probably most familiar with this revolving credit product—there are over 590 million credit card accounts in the U.S. and, on average, Americans have ~4 active credit cards. A credit card may be an unsecured revolving line of credit, providing a convenient way to make purchases upfront that you can pay over time with interest. Plus, many credit cards come with cash back perks to reward your spending. 
• Personal line of credit: Some financial institutions offer personal lines of credit, an unsecured revolving credit account. These accounts allow you to continually borrow money against a set credit limit for a preset term, or “draw period”, and pay it back with interest.
• Home equity line of credit (HELOC): Some homeowners may also have the option to take out a HELOC, a secured revolving line of credit. HELOCs operate similar to a personal line of credit, except that they are secured by your property. Because of that collateral, HELOCs typically have a lower APR than other types of revolving credit (according to CNBC, as of August 2024)

Risks of Revolving Credit

Like any financial product, revolving credit comes with risks. If used responsibly, revolving credit can be a great way to build your credit and make purchases you would like to pay over time with interest. But, revolving credit comes with some risks, especially if it’s not managed well. 

• Higher interest rates 
• Debt accumulation
• Potential negative impact on credit score if payments are missed
• Fees and penalties

One of the most common risks of revolving credit is something referred to as the credit card trap. This causes you to carry around a balance on your credit cards which can cost you money in interest and impact your credit utilization ratio, a factor that affects your credit score. Here’s a scenario to explain how it works:

• You purchase something with your credit card and take advantage of being able to pay it off later.
• When your credit card bill arrives, you either make the minimum payment or make a payment that doesn’t cover the entire statement balance. Whether you carry that remaining balance for a short period of time or a prolonged one, you are typically charged interest until the balance is paid in full. The longer you carry the balance, the longer your interest charges can accrue.
• As your credit card balance grows, more of the monthly payment goes toward interest rather than reducing the principal balance. This can lead to a cycle of making payments without significantly reducing the debt.
• This balance can grow to a level where it's hard to pay down your principal and you open another credit card to help manage cash flow, adding more debt with no end unless you have the cash to fully or significantly pay it off.

5 Tips to Manage Revolving Credit

Using revolving credit responsibly can save you money and help improve your credit score. Follow these 5 tips to manage your revolving credit accounts.

1. Choose the right revolving credit product for you. Depending on your financial situation, a credit card might make more sense than a personal line of credit, or vice versa. Determine which product is best for your needs.

2. Read the fine print. The fine print on most revolving credit agreements includes crucial details about fees, interest rates, and more. Read through the fine print and understand the terms and conditions before opening an account.

3. Decide how you will use your credit. Avoid falling into revolving debt by setting parameters on how you will use your credit. For example, maybe you commit to using a HELOC exclusively for home improvement projects or using one specific credit card exclusively for travel-related purchases. Only spending on your pre-determined purchase categories can help you avoid overspending and, potentially, overextending. 

4. Be strategic with your payments. If you can’t pay off your balance in full, make the largest payment possible each month or make multiple payments in one month. You’ll get charged less interest on a $200 balance than on a $1,000 balance. Develop a strategy to pay off debt as quickly as possible, focusing on high interest credit cards first. Just remember to factor in your necessary monthly expenses before committing to the largest possible payment you can make. 

5. Monitor your spending. Paying off a monthly balance is great, but it won’t mean much if you rack up another balance you can’t pay off the next month. Monitor your spending frequently and adjust as needed to maintain a zero balance.

Revolving Credit Alternative 

Revolving credit can work well if used responsibly, but doing so can be challenging. Looking for an alternative? Upgrade Card¹ combines the flexibility and perks of a cash-back rewards credit card with the predictability of a personal loan. Each statement period, your Upgrade Card transactions are combined into an installment loan with a predictable monthly payment. That means you know when you’ll pay off your charges and can save on interest over time. 

Learn more about Upgrade Card and see if it’s a good fit for you. You can check to see if you have an offer with no impact on your credit score.

¹Credit Lines feature Annual Percentage Rates (APRs) of 14.99% - 29.99% and line amounts ranging $500 - $25,000. The lowest rates require Autopay and the majority of the line amounts will be $15,000 or under. For example, a $5,000 transaction with a 36 month term and a 19.99% APR has a required monthly payment of $187.90. Optional ACH transfers to your bank account, balance transfers, ATM withdrawals (if available), and foreign transactions are subject to applicable fees that, if incurred, will increase your finance charge and APR. Late fees and insufficient funds fees may apply. Your rate, line amount, and default term depend on maintaining a qualifying credit score, your credit usage history, requested amount, and other factors. The Upgrade Card is unique in that it allows you to obtain a series of closed-end loans which you may access through transactions such as card purchases up to an approved amount. As you repay your balance, additional credit may become available to you up to an approved amount subject to meeting our credit requirements, but your line will not replenish automatically.