When you start talking credit, it is important to know that there are two basic kinds: revolving and not-revolving. Revolving credit is probably the easiest kind of credit to get (think: credit cards). This is credit that "revolves," as it is constantly renewed as you pay it off. It is basically an open credit account. The other, non-revolving, type of credit is designed so that once the loan is paid off, if you want another loan you have to re-apply. And this time you could be denied.
How revolving credit works
Revolving credit accounts consist of a credit limit, rather than a loan amount. Although, technically, the credit limit is the loan amount. You can borrow any amount up to the credit limit. And, as you pay down your credit account, you can continue to borrow. Unless the credit account is closed, revolving credit remains available to you as long as you are under the credit limit.
Common types of revolving credit accounts
There are two main types of revolving credit accounts. You are probably at least somewhat acquainted with them: credit cards and home equity lines of credit. Both of these have their uses, and both can be dangerous if you get too carried away.
- Credit cards: Credit cards are the most widespread form of credit. Just about everyone over the age of 18 (and even some under) has a credit card. These are revolving credit accounts that allow you to borrow money up to the credit limit. They are very easy to get, and often the interest rates are quite high. Getting into deep credit card debt is easy, since you can make payments of between $100 and $500 to "free up" money and keep spending with the credit card. Additionally, it is usually possible to get more than one credit card from more than one company without too much trouble.
- Home equity line of credit: A home equity line of credit works rather similarly to a credit card. This revolving credit account can only be obtained, though, if you own a home and have built some equity in it. A home equity line of credit is an approved amount that you can borrow in an open line, usually based on the equity in your home. You can pay this type of revolving credit down as well, and then borrow more later. Because the account is secured (unlike a credit card account), the interest rates are very reasonable. However, if you get in too deep you could lose your home.
Any type of debt should be managed in moderation. It is important that you carefully consider when to use your revolving credit accounts, and try to avoid becoming ensnared and overwhelmed by debt. Revolving credit can be very helpful, since it is always there, but it can also be deceptively seductive.