What is revolving credit and how does it work?

Anytime you use your credit card, you’re using revolving credit. Personal lines of credit (PLOCs) and home equity lines of credit (HELOCs) are also forms of revolving credit.

Learn more about how revolving credit works, what a revolving balance is and how to stay in control of your revolving credit accounts.

What you’ll learn:

• Credit cards, PLOCs and HELOCs are examples of revolving credit.

• When you borrow from a revolving account, the amount of available credit goes down. It goes back up when you repay it.

• Revolving credit accounts generally stay open as long as the account is in good standing.

• Revolving credit is different from installment credit. Mortgages and auto loans are examples of installment credit accounts.

Revolving credit refers to a line of credit that can be used and then paid down repeatedly as long as the account remains open and in good standing. It’s also known as open-ended credit.

Revolving credit accounts, such as credit cards, typically come with a preset credit limit. This is the maximum amount cardholders are allowed to charge to the account.

As cardholders make purchases, the available credit will decrease. And with every payment, the available credit will go back up. Fees and interest could also affect the available credit.

With a revolving credit account that functions like a credit card, there are two general payment options:

• Make a partial payment and carry a balance. Generally, you must make at least the minimum payment every month. The minimum payment will likely vary based on your statement balance. If you don’t fully pay off your revolving credit balance at the end of each billing cycle, the unpaid portion carries over to the next month. That’s your revolving balance.

• Pay off your balance in full. Paying off your balance every month can help you avoid or limit interest payments on a revolving credit account.

Common types of revolving credit accounts include credit cards, PLOCs and HELOCs:

• Credit cards: Credit cards can be used for any purchases, from the everyday to the unexpected. Some come with rewards and benefits for an added advantage.

• PLOCs: A PLOC is similar to a credit card, but it’s not linked to a physical card. Instead, you might get the funds in the form of a check or a direct deposit into your bank account. 

• HELOCs: A HELOC is an open-ended credit account that lets you borrow money against the value of your home. You can borrow and repay the money multiple times against a preset credit limit. This isn’t the same as a home equity loan home equity loan (HEL), which is typically a lump sum of money you borrow once with a fixed interest rate.

Like other types of credit accounts, the way a revolving account impacts your credit scores largely depends on how you manage your account.

Here’s a look at how revolving credit could affect some of the factors used to calculate credit scores: 

• Credit utilization ratio: Your credit utilization ratio is how much available credit you have compared to the amount of credit you’re using. The Consumer Financial Protection Bureau (CFPB) recommends keeping your utilization below 30% and paying off your entire balance whenever possible. 

• Payment history: Payment history shows how reliable you’ve been in making payments on your credit accounts across time. Making consistent on-time payments to your revolving credit account can demonstrate good credit behavior and could improve your scores.

You’ve read that credit cards, PLOCs and HELOCs are examples of revolving credit accounts. Installment loans such as auto loans, mortgages and student loans are examples of nonrevolving, or closed-ended, credit accounts. 

A major difference between the two is that with open-ended revolving accounts, you can use the line of credit repeatedly, up to a certain credit limit, for as long as the account is open. But with closed-ended installment loans, you borrow the amount once. The account is closed once your balance is paid off. 

You might see other differences in:

• Payments: Installment loan accounts are generally repaid in regular, equal payments—also known as installments—over a specific period of time. And in some cases, there might be a prepayment penalty for paying off the loan ahead of schedule. But on a revolving credit balance, you may only have to make the minimum monthly payment plus applicable interest and fees.

• Interest rates: Installment loans may have lower interest rates than revolving credit accounts if they’re backed by collateral. But keep in mind that it might be possible to avoid interest charges on revolving credit if the balance is paid off every month.

• Flexibility: Revolving credit might give you more flexibility compared to some installment loans. For example, a credit card can be used for a variety of purchases. But many installment loans are for a specific purpose, such as a car loan or mortgage. 

The specifics of how a revolving or nonrevolving credit account works can vary based on the lender and other factors. It’s always a good idea to make sure you understand the terms of any credit agreement you enter into.

Here are some common questions about revolving credit.

Using revolving credit can make it easy to access funds when you need them, up to your credit limit. And when you consistently manage your revolving credit accounts responsibly, you might even be able to improve your credit scores.

Thinking of opening a revolving credit account? Compare credit cards from Capital One and find which card is right for you.