23 Jan What is Revolving Credit?
Revolving credit refers to a credit line category that enables you to have access to a certain amount of money (known as a credit limit). You are able to borrow up to this maximum amount, and once you start to make repayments on this balance (as well as paying interest based on the amount overdrawn) you are able to borrow against the account once more.
It is called revolving credit as it possible for you to make a minimum repayment and then essentially ‘revolve’ the rest of the outstanding debt from one billing period onto the next. Keep in mind that whilst this is possible, you are likely going to need to pay interest on this amount.
In many ways, a revolving credit facility works in a similar way to an overdraft, as you can borrow funds when you need to.
What is non-revolving credit?
Conversely, non-revolving credit means that any repayments made are fixed from the beginning of the agreement. That means you will know from the start exactly how much you will pay each month for repayments and for how long. For example, a common type of non-revolving credit is a loan.
What are examples of revolving credit?
The most common form of revolving credit is a credit card. This is because whilst you have a credit limit, you have the choice of how much you pay and repay every month.
Another form of revolving credit is a flexible overdraft, where you can decide the limit of your overdraft each month.
How does revolving credit work?
Using a revolving credit facility is much more common amongst businesses.
For example, if you had a revolving facility that had a credit limit of £2,000, you could borrow £1,000 (for buying new stock) and then pay off the amount plus the interest over a number of months.
Once you have paid the outstanding balance, a revolving credit facility enables you to borrow up to the full £2,000 again, should you need or want to.
Why is revolving credit popular with businesses?
The main reason is because of convenience. Companies can use a revolving credit facility to help with cash flow without having to spend time applying for a loan each time they need access to funds.
This is because revolving credit allows firms to withdraw and repay a number of times over the course of the agreement, without having to set up a new loan contract each time.
What is the eligibility criteria for revolving credit?
The exact criteria will depend on the lender and whether it is for business or personal purposes. But common eligibility criteria can include:
- The business director’s personal guarantee
- Evidence of regular cashflow
- Stable income
- Good credit score
When we talk of a personal guarantee, this means that you sign an agreement that means you are the one who is personally liable for the loan, should the firm be unable to keep up with loan repayments.
If you are trying to access a revolving credit facility for your company, then it is likely your application will be based on the financial health of your firm. This means you will likely need to provide evidence of healthy cash flow.
If you are looking for a revolving credit facility to be used on a personal basis, then your credit score will likely be assessed heavily in the loan application process.
How good (or bad) your credit score is will determine whether your application is approved or declined. If you are accepted for a revolving credit facility, then it will also determine your credit limit too.
If you are declined based on your credit score, there are a number of ways you can improve your credit score.
How much do revolving credit facilities cost?
Typically, revolving credit facilities cost more than a fixed-term loan due to the level of flexibility and convenience they provide borrowers. The exact amount it will cost you will depend on the lender, account balance and fees the individual lender charges.
Keep in mind you will need to pay off the account balance which is not only the amount you have borrowed but can include charges such as :
- Balance transfers
How long do revolving credit facilities last for?
Usually, revolving credit facilities will last anywhere between six months and two years in total. However, it is often possible to have extensions on revolving credit facilities, providing that you have kept up with your repayments so far.
Does revolving credit impact my credit score?
It could positively impact your credit score providing you act responsibly.
What we mean by this, is that a revolving credit facility enables you to demonstrate whether you are responsible when it comes to money management.
This is because revolving credit allows you to have flexibility with how much of the credit limit you use, how much you pay off, as well as when you pay it each month.
Nevertheless, revolving credit can harm your credit score if you are irresponsible with it. If you spend most of your credit limit and fail to make repayments, this will lower your score and make it harder to gain credit in the future.