Revolving Credit - Explained
What is Revolving Credit?
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What is Revolving Credit?
Revolving credit, also known as a line of credit, is a line of credit where the customers can access the money until they have borrowed up to the maximum limit set by an agreement. After paying back all or some portion of the outstanding balance (and any applicable interest), the borrower can again borrow against the account.
How Does a Revolving Line of Credit Work?
In this line of credit, the customer pays a commitment fee to a lending institution for borrowing money. The amount is not fixed, and it depends on the need of the borrower. There is an upper limit, also known as the credit limit. Both corporations and individuals can take out this line of credit. With businesses, the funds are generally used for operational purposes. Along with the commitment fee, the corporate borrowers need to pay interest on the money borrowed. Some borrowers are required to pay carry-forward charges if interest is not paid. Financial institutions (typically banks or credit unions) enter into an agreement with customers after reviewing their financial records. These lenders judge the paying ability of the borrowers by reviewing their credit score, monthly income, and employment status. For corporate borrowers, the balance sheet, income statement. and cash flow records are reviewed. The interest rates on revolving credit lines are generally higher than on similar installment loans. Revolving credit is the best for fluctuating cash flows and unexpected expenses. The main advantage of this type of credit over the traditional installment loan is its flexibility. Home equity lines of credit and personal lines of credit are two of the most common examples of revolving credit. Revolving credit is for a shorter period of time and generally for smaller amount than fixed sum, installment loans. The primary convenience is based upon the borrower being pre-approved. The borrowers do not have to go through a lengthy phase of paper work to borrow the money. They only have to pay the interest and any other applicable fees. The financial institution need more structured loan terms for a long-term loan for a larger amount. Business credit cards and revolving credit are similar but different. With a credit card, a there must be a transaction of some sort. With revolving credit, no such purchase or transaction is required. The amount is directly transferred to the account of the customer. Also, no physical cards are involved in revolving credit. Its more like a cash advance. Also, the interest rate on revolving credit is generally lower than the credit cards interest rate.