What is revolving debt?

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In a Nutshell

Revolving debt refers to the balance you carry from any revolving credit. Credit cards are probably the most well-known type of revolving credit, but other lines of credit — such as a home equity line of credit — are also revolving and can be a part of your revolving debt if you carry a balance.
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If you want to borrow money for everyday expenses or a major purchase, you might wonder what kind of debt you should take on.

Different types of debt are right for different budgets and needs. According to the Q2 2019 Household Debt and Credit report from the Federal Reserve, revolving debt is the most commonly held type of debt in the U.S. And the most common type of revolving debt is credit card debt.

There’s also nonrevolving debt, like the debt carried on installment loans like auto loans, student loans and personal loans.

Let’s take a look at some examples of revolving debt and when carrying it might make sense for you.

What is revolving debt and how do people use it?

Revolving debt is made up of the balances you carry on any revolving credit lines you have open. Carrying debt is not unusual. In fact, according to the Federal Reserve, Americans were holding $1.05 trillion in outstanding revolving debt at the end of 2018 — an increase of nearly 19% in just four years.

According to a study by the Consumer Payments Research Center, the more credit that someone has, the more debt they carry. The same study also shows that age doesn’t seem to significantly affect spending until people are in their 70s, which the study points out is when credit utilization falls below 20%.

Common examples of revolving debt include any balances you owe on the following types of credit:

  • Credit cards If you’re approved for a credit card, you’ll have a credit limit that dictates the most you can spend on your card. As you pay off your credit card balance, you’ll free up more of your credit line for future spending. Just keep in mind that any balance you carry usually accrues interest.
  • Personal line of credit Similar to a credit card, a personal line of credit gives you access to a preapproved amount of money. You’ll usually apply through a bank or credit union and have a certain amount of time to draw from the account. As you repay what you owe, you’ll free up more of your line of credit to use.
  • Home equity line of credit (or HELOC) — Like a personal line of credit, a HELOC allows you to borrow up to a preset limit and then pay back what you borrow with interest. But with a HELOC, you borrow against your home’s equity, which is used as collateral. You’ll usually have a “draw period” when you can spend money and a “repayment period” when you must repay any outstanding balance with interest.

Is carrying revolving debt a good idea?

Revolving debt may be helpful, if you’re careful about how you use it. Mishandling revolving debt — say by missing payments or using too much of your available credit — can hurt your credit.

Revolving debt may help you build your credit if …

  • Your credit utilization stays low. Too much revolving debt can affect your credit scores. Generally, you want to keep your credit utilization below 30%. But if you’re close to maxing out your limit, your credit scores could drop. Even if you have to carry a balance from one billing period to the next, try to keep your credit utilization under this 30% threshold.
  • You make payments on time. Payment history is one of the biggest factors in determining you credit scores. Missed payments may cause your scores to take a hit, and you could be charged a late-payment fee.

It’s also a good idea to pay off your balance on time and in full every billing period. It can help you stay on top of what you owe so that you don’t get buried in interest charges. With credit cards, as long as you pay off your entire statement balance on time each month you shouldn’t see any purchase interest charges on your account.

Revolving debt may not be right for you if …

  • You need a lot of money right away. If you need to cover a major expense or finance a big home repair, you can still apply for revolving credit. But you may want to consider nonrevolving credit like a personal loan, which comes with a fixed timeline to repay what you owe.
  • Your credit history is less than perfect. Lenders are less likely to approve you for a line of revolving credit or offer ideal interest rates if you don’t have proof of a solid credit history. If you’re approved, you may face a high interest rate, which means carrying a balance could cost you a lot in interest.
  • You constantly hit your limit. Credit utilization can have a significant impact on your credit scores, and a high credit utilization rate may tell lenders that your finances are stressed.

What’s next?

Taking on revolving debt, whether it’s through a credit card or line of credit, may be a good way to finance a large purchase — if you have the means to repay it.

If you don’t have good credit, you may want to pay down any debt you already have before applying for a new credit card or loan.

About the author: Dori Zinn is a personal finance journalist based in Fort Lauderdale, Florida. She enjoys helping people find ways to better manage their money. Her work can be found on numerous websites, including Bankrate, FinanceBu… Read more.