What is a revolving account?
The term “revolving credit” or “revolving account” refers to an account on your credit report that has a credit limit set by the lender but allows you to determine how much you will charge (within that limit) and how much you will pay off each month.
Credit cards are the best-known type of revolving credit. Others include lines of credit, such as a home equity line of credit (HELOC). Because they are a good indicator of credit risk, having at least one positive credit card account is beneficial for credit scores. The important thing to remember is to only charge what you can pay back in full each month.
How Does Revolving Credit Work?
With revolving credit, you have the option to either pay the balance off in full at the end of each billing cycle or to carry a balance over from month to month. Carrying a balance from one month to the next is referred to as “revolving” the balance.
Revolving accounts typically charge interest for any balance carried over month to month, and there may also be other fees associated as well, such as annual fees or late payment fees.
Aside from payment history, credit scores also look at your balance-to-limit ratio, also called your utilization rate on revolving accounts. This is calculated by taking the total of all your revolving account balances and dividing them by the total of your credit limits on those accounts.
The lower the utilization rate, the better, so keeping balances low and paying them off in full each month is ideal.
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The “Ask Experian” Team