Own a credit card? Then, it is important you know exactly what a revolving credit means and how it is calculated to get a better understanding of your statements.
It is said that in the United States, only 40% of individuals pay their bills and credit card debts as per schedule. The rest pay heavy interest rates, which often eventually leads to bankruptcy or complete dissolution of certain businesses. The basic principle― buying now and paying later―is also the basis for revolving credit. Let’s understand the concept better.
Revolving credit is a type of short term loan, where a bank or financial institution gives you a certain amount of loan money (credit), which you have to pay as and when you use it. It is an open-ended credit, where the interest rates might change and the money can be used for any purposes of your choice. This is a little different from closed-end credit, where you have to pay fixed installments, decided by fixed interest rates, and a fixed purpose of borrowing (e.g.: home loans). Apart from individuals, even companies and industries apply for revolving credit.
Revolving Credit Limit
A revolving credit limit is basically the credit limit up to which you can borrow. This figure might change depending upon your amount and interest dues. If the bank lends you credit with a limit of USD 1000, this is the amount up to what you can spend. It is called so, because it keeps changing depending on how much you use and how much you pay. You need to give back what you take, to take more. If you have a very good credit history, the bank or finance institution might even consider increasing your limit.
Calculating Revolving Credit
Let’s look at a simple example to see how revolving credit works. Suppose your revolving credit limit is USD 5,000. You make purchases of USD 3,000. Your limit now stands at USD 2,000. Then, you make a payment to the bank of USD 1,000. After this your credit limit stands at USD 3,000. If you don’t pay in time, you are charged a specific amount of interest.
Credit limit: USD 1,000
Purchases made: USD 500
Made payment to the bank: USD 250
After this, you credit limit is USD 750 [USD 500 (pending limit) + USD 250 (payment made)]
Now, if you don’t make the outstanding payment of another USD 250 in a stipulated time, you are charged interest on that, depending upon the decided interest rates. This due amount keeps on increasing due to added interests, and eventually you have to pay more than the worth of those purchases. To avoid this increase in dues, it is advised you pay your debts on time. However, you should consider checking and rechecking your revolving credit plans before keeping or paying any dues. This was just an example and the rates mentioned are not standard.
Now that you know what this limit means, you can keep your dues and interest charges in check, and pay your bills on time to maintain a good credit score.