Revolving credit and non-revolving lines of credit are two financial instruments that allow you to access a specific amount of money upfront.
With revolving credit, a borrower can continually access funds up to their credit limit and then, once they repay those funds, their available credit will get replenished. The line of credit remains open for use until either the borrower or lender closes it. On the other hand, a line of credit that’s non-revolving is a one-time arrangement — after the borrower spends the set credit limit and pays off the amount in full, their account will be closed.
Understanding the differences between a line of credit and revolving credit, as well as the impact of either choice, can make a big difference in your financial situation.
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Understanding Revolving Credit and How It Works
Revolving credit offers the ability to use a particular sum of money over and over again. You’re usually given a credit limit, and you can spend up to that limit. As you make payments to your account, your available credit increases once again.
One example of revolving credit is a credit card. You have an initial credit limit and can continue to make charges to your card as long as your total balance stays below your credit limit. As you make payments, you can continue to use your credit card each month.
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Pros and Cons of Revolving Credit
The biggest upside of revolving credit is that you can use the money over and over again, as long as you continually pay down your balances. This setup can be helpful if you have short-term expenses to cover, as you’ll have a pool of money you can dip into and then quickly repay. Plus, you’ll only accrue interest charges and make payments on the amount you actually use. You can usually keep your interest at zero if you repay the full amount you borrowed every month.
There are a few cons to revolving credit though. For one, they may have higher interest rates compared to some other types of loans, such as traditional installment loans. Additionally, your revolving credit may come with annual fees. There’s also the potential to negatively impact your credit if you don’t use revolving credit responsibly, as you could drive up your credit utilization rate by using too much of your available credit limit.
Understanding a Line of Credit and How It Works
A line of credit, such as a personal line of credit, can be either revolving or non-revolving. If it’s a non-revolving line of credit, you have access to the initial sum of money, but once you spend it, you won’t be able to access it any more. Otherwise, non-revolving lines of credit function similarly to revolving credit lines.
How Is a Credit Line Determined?
The credit line that you receive through a line of credit or a credit card (such as the one offered by SoFi) is determined by the issuer. This determination is based on their evaluation of a number of different factors. Specifically, a lender may review your credit history, employment and income, and any previous credit you’ve had with them. They may also use proprietary algorithms to determine how much credit to extend.
What Credit Score Is Needed for a Credit Line?
Generally speaking, the higher your credit score, the better the chance that you’ll be approved for a credit line. You will also often get a lower interest rate the higher your credit score. This is another reason why it’s a good financial practice to work toward improving and maintaining your credit score.
Calculating Interest on a Credit Line
Most credit lines and revolving credit charge interest for any amount that remains outstanding after the statement due date. The interest rate you’re charged is determined by the card issuer and the terms of your credit line.
If you pay off your credit line in full by the statement due date, you may not owe any interest at all. But if you have an outstanding balance, you’ll likely be charged interest on the total balance that remains.
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Pros and Cons of Line of Credit
One pro of a line of credit is that you may be able to have multiple lines of credit. These may be with different banks or through different products that are issued by the same bank. Another upside is that non-revolving lines of credit tend to have lower interest rates, and they’re often for higher amounts compared to revolving credit.
However, a downside of a non-revolving line of credit is that you’re only able to access your credit line once. Even if you make payments toward your balance, you won’t be able to access your money again, like you would with revolving credit. If for whatever reason you decide you’d like to borrow additional funds, you’ll have to go through the hassle of another application and approval process.
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Similarities Between Revolving Credit and Lines of Credit
It’s important to note that a line of credit may either be revolving debt or non-revolving. So it’s possible that a particular line of credit will also be revolving credit and share all of its similarities.
Another similarity between revolving credit and a line of credit is that they both allow you to access a specific amount of money (your credit limit) upfront.
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Differences Between Revolving Credit and Lines of Credit
The biggest difference between revolving credit and a non-revolving line of credit lies in how often you can access it. With revolving credit, you can access the money in your credit line as often as you need, as long as your total balance remains below your available credit limit. With a non-revolving line of credit, however, you can only access your available credit one time.
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Lines of Credit vs Traditional Loans
Lines of credit differ from traditional loans in a few key areas, and it’s important to understand the differences.
With a line of credit, you have control over when and how you access your money — you don’t have to take it all at once. If your line of credit is a revolving line, you can even access your money repeatedly, as long as your total balance is below your credit limit.
Meanwhile, with a traditional installment loan, you get all of your money in one lump sum, usually at or near the date of closing. You’ll then pay a fixed amount each month until your loan is completely paid off. Mortgages and many personal loans are often considered traditional loans.
The Takeaway
Both revolving credit and non-revolving lines of credit offer access to funds, though there are key differences between revolving credit and a line of credit. With a non-revolving line of credit, you can only access the total amount of money once. In contrast, revolving credit allows you to access the money multiple times, as long as the outstanding amount is less than your total available credit amount.
A credit card is considered one form of revolving credit, since you can continue to make purchases as long as your outstanding balance is below your credit limit. If you’re in the market for a credit card, you might look at rewards credit cards like the SoFi Credit Card. With the SoFi Credit Card, you can earn cash-back rewards, which you can then use to invest, save, or pay down eligible SoFi debt.
For a limited time, new credit card holders† who also sign up for a SoFi Checking and Savings with direct deposit can start earning 3% cash back rewards on all eligible credit card purchases for 365 days*. Offer ends 12/31/23.
FAQ
What’s the difference between an installment loan and a revolving line of credit?
A revolving line of credit and an installment loan are different ways to access money. With an installment loan, you get all your money upfront and then make fixed monthly payments for the term of the loan. With a revolving line of credit, you’re given a credit limit and can then choose to access however much of that limit you need, only paying interest on your outstanding balance.
Can mismanagement of my revolving credit damage my credit score?
Yes, it is possible to damage your credit if you don’t manage your revolving credit responsibly. For example, missing payments or keeping a high balance on a revolving line of credit can both have negative effects.
What is the duration of a revolving line of credit?
Your revolving line of credit typically will remain open until either you or the lender decides to close it. There are several reasons a lender may close a revolving line of credit without a borrower’s permission, including a prolonged period of inactivity, a history of late or missed payments, breached terms of the agreement, or repeated spending over the credit limit.
How does interest work for revolving credit?
Typically, borrowers will only pay interest on the amount they’ve accessed from their line of credit. Interest charges generally only apply to any balance that remains after the statement due date.
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