A good credit score signifies that your financial situation — along with other aspects of your life — is on the right track. For this reason, creditors, landlords, and even prospective employers check this data to learn more about how financially responsible a person is.
For this reason, individuals with high credit scores enjoy various benefits, including better insurance rates, lower interest rates for cards and loans, and higher credit limits.
Boosting your credit ensures that you don’t delay building your wealth or enjoying your retirement. So, how do you achieve this feat?
One of the fastest ways to lift your credit score is to pay down your revolving debt as much as you can to lower your utilization percentage.
So, what is revolving debt and how does it impact your credit? This article will discuss everything you need to know about using revolving debt to achieve your financial goals.
Revolving credit is a type of credit that doesn’t have a fixed number of payments, unlike its installment counterpart. Your total revolving credit lines make up your revolving debt — which isn’t unusual at all.
In fact, the latest Statista report shares that the total revolving credit outstanding in the U.S. amounts to $1.01 trillion.
Here’s how revolving debt works: When a creditor approves your credit, the issuing financial institution establishes a credit limit you can use repeatedly, whether in whole or in part. Typically, there’s no expiration date for this credit type.
Borrowers typically use revolving debt for short-term and smaller loans. After all, larger loans require more structure, such as installment plans and preset amounts.
Revolving credit implies that a lending institution has pre-approved a business or individual loan. Under this setup, re-evaluation is not necessary for every transaction.
Every payment you make, minus charges, replenishes your available credit limit. As long as your account remains in good standing, you won’t have trouble borrowing against your debt ceiling.
Below are some common examples of revolving debt:
There are two major credit types:
Installment loans provide borrowers with a fixed amount of money for repayment over a specified period in fixed monthly installments. Auto, mortgage, and student loans are examples of this credit type.
The main difference between the two is that paying off an installment loan closes your account. You can’t simply re-open it and borrow the same amount again.
With revolving credit, on the other hand, you can draw or spend within your limit as soon as you free up more of your balance.
One of the biggest advantages of installment credit is that you know exactly how much you need to pay monthly. This setup makes it easier to set a budget.
However, installment loans don’t offer much flexibility. You can’t make a minimum payment on your debt because you risk losing the asset you’re paying for, like a car or a house.
Revolving credit can be an excellent source of income for small businesses and individuals. Below are some of the benefits of taking advantage of this debt type:
As soon as a lending institution approves your credit, you can use it on whatever you need. You don’t need to go through a lengthy approval process every time you need more cash.
Also, even if you don’t need money immediately, you’ll have peace of mind knowing that you have access to such funds in the case of an emergency.
Revolving credit allows borrowers to get only the amount they need and pay it back by a set due date. They can pay the debt back in full or in installments.
Note that partial payments for this debt type may lead to massive fees from lending institutions.
One of the major benefits of applying for secured financing is that you can enjoy lower interest rates. You can use various collateral types for it, too, like equipment, inventory, or real estate.
Lending institutions often follow a frustratingly slow approach to expanding credit lines, except for revolving debt. Banks, credit card companies, and credit unions review revolving credit lines constantly and will not hesitate to raise your limits if you’re a reliable payer.
These debt types — especially credit cards — offer cash back, points, or travel miles for loyal users for every dollar spent. Issuers can offer lucrative rewards because of the interest and fees they collect from their clients.
If you want to make the most from your rewards, apply for everything you qualify for and avoid carrying interest. This ensures that your rewards will outweigh your penalties.
Revolving debt may benefit some businesses and people, but it’s not for everyone. There’s no one-size-fits-all financial solution that addresses everyone’s needs.
We only recommend utilizing revolving debt if you use it carefully. Remember, mishandling your payments can lead to massive penalties.
Revolving debt can help you impact your credit positively if you follow these tips:
Revolving debt may not be the best solution for you if:
Any time you spend on credit, it may affect your credit score and therefore impact lenders’ view of your creditworthiness. This is why every move you make regarding your revolving credit impacts your FICO rating.
Below are some revolving credit components that creditors keep an eye on:
The most critical factor regarding your debt is your payment history, which accounts for 35% of your score. It includes information on whether you make timely payments and how often you miss them.
In most cases, lenders report payments made 30 days after the due date to credit bureaus.
Missing payments is the worst thing you can do for your reputation as a borrower. As much as you can, try to cover at least the minimum amount due from your revolving credit.
The amount of your debt accounts for 30% of your score. Maxing out your revolving credit across various institutions sends a red flag to potential lenders.
It’s best to maintain a credit utilization of 30%. For instance, if you have a $5,000 limit, a $1,500 carrying balance would be ideal.
Creditors want to see a stable relationship between you and lending institutions. For this reason, your credit history accounts for 15% of your FICO score.
In a nutshell, the older your revolving debt accounts, the better.
Additionally, new accounts affect your score, too. New credit makes up 10% of your score because opening too many accounts at once signifies a desperate need for cash.
Credit bureaus check your credit mix for the final 10% of your score. Creditors prefer businesses and individuals that manage various debt types, including revolving and installment loans.
A healthy combination of credit cards, home loans, and auto loans may improve your score.
Now that you know the components of revolving debt that affect your credit score, here are some tips to improve it:
Revolving debt is the combination of various credit types that don’t require a fixed number of payments. Instead, it implies pre-approval to borrowers.
Every payment you make toward your debt frees up space in your credit limit again, just like in credit cards. It’s ideal for small, short-term loans you can use to boost your cash flow.
Do you want to open a revolving account now? Do it with 121 Financial Credit Union.
We at 121 Financial Credit Union have met our community’s financial needs since 1935 through our wide range of services. We offer lower rates than other lending institutions, helping our members achieve their financial goals.
Book an appointment with one of our specialists now to secure your financial future.