If your divorce damaged your credit, that’s good news. Your credit can be rebuilt over time. If possible, you should do everything you can to protect your credit during a divorce, but remember that you don’t have to be stuck with damaged credit forever if the worst happens.
A revolving loan is a type of loan that a borrower can use multiple times to finance purchases and, if needed, to finance emergencies. The borrower must repay the amount used to finance the purchase, but the money can be used again. Hence the term rotation!
What most borrowers are trying to achieve with a revolving line of credit is to increase their credit limit so that they can use it when needed, especially in emergencies. Common questions we receive include:
- How much revolving credit should I use?
- When should I use revolving credit? How does a high balance affect my credit score?
- Can a revolving loan significantly improve your reputation as a creditor?
What is revolving credit?
A revolving loan is a type of open credit account, like a credit card, that allows you to borrow up to a certain amount and make payments on the loan amount. Once you’ve paid off your loan in full, you can borrow as much as you need on that loan (as long as the account is open).
Think of your revolving credit as a spending cycle. You can spend the borrowed money, pay it back and spend it again. Don’t exceed your credit limit. There is a risk that your account will be closed.
What types of revolving credit are there?
A credit card is just one type of revolving credit account. There are several different loans available, including home equity lines of credit (HELOCs) and personal lines of credit. Each type of revolving loan has different terms. Read the loan agreement and prepare a repayment plan to avoid interest accruing on your account.
- Credit card: If you can get a loan or get a loan with a card. Depending on how you use your card, you can make everyday purchases like groceries or bulk purchases based on the amount of credit or credit limit on the card. Your card may also offer benefits such as cashback or rewards.
- Home Equity Loan (HELOC): According to mycreditunion.gov, a home equity loan is an open-ended line of credit that is usually secured by the consumer’s primary home. This means that you can use the loan specifically for your home. Unlike credit cards, HELOCs can be used with checks or by transferring money to a checking or savings account.
- Personal Line of Credit: Similar to a credit card, but instead of using a card, your lender can deposit the line of credit directly into your checking or savings account, or by depositing the line of credit by check.
What’s the difference between revolving and non-revolving credit?
Unlike revolving loans, money from non-revolving loans cannot be loaded and reused. Once your credits are used, that’s it and your account will be closed. A rollover allows you to top up your account and use it to borrow again.
Some examples of non-recurring credit accounts include:
- Student loans
- Auto loans
- Home Mortgages
- Business loans
The cool thing about non-revolving credit accounts is that lenders offer higher loan amounts on those types of loans, and the debt is easier to manage. This means you won’t have the urge to spend more on top of what you’ve already borrowed. Once you used the loan once, that’s it. You’re just repaying it back.
How does revolving credit affect my credit score?
As with any loan, the lender will look at your credit history and conduct a thorough investigation, which may lower your credit score by a few points. Just opening a new revolving credit account can boost your score because it adds to your desired credit mix. But the key to revolving loans affecting your credit score is primarily how you use your account.
Keep your credit utilization low: Your credit utilization is the amount you currently owe divided by your credit limit, expressed as interest. This shows your creditworthiness to the lender. If you have multiple credit cards, a personal line of credit, and other types of debt, lenders will calculate all of your debt to determine your creditworthiness.
Pay your balance in full each month: Yes, your lender may only allow you to pay the minimum amount, but this will result in more interest accruing on the balance. If possible, pay off the balance in full each month. If you plan to pay off your debt before making a big purchase, you can set aside a certain amount of money to pay off the balance in full.
