Whether you’re planning to make a major purchase, pay for house renovations or cover unexpected expenses like medical bills, a
revolving line of credit could present a viable financial solution.
Put simply, a revolving line of credit is a loan offered by lending institutions that you repeatedly use and repay. Credit cards, which allow users to make minimum payments or pay down their debt in full, are one of the most common forms of revolving
lines of credit.
If approved for a revolving line of credit, a borrower can withdraw funds as needed from a maximum amount, or credit limit, set by the lender.
With a revolving line of credit, the amount of money available will decrease and increase as you borrow and repay the funds. Borrowers make payments based on the amount used, which include interest on the amount withdrawn.
Once approved for a revolving line of credit, you’ll generally be required to make minimum monthly payments on the debt you accumulate. If you want to pay off the debt on your line of credit faster, you can make additional payments each month or
fully repay your loan at any time. These accounts are referred to as “open ended,” meaning they don’t get assigned an end date. Borrowers can continue using a revolving credit account as long as it remains open and in good standing.
How much can you borrow with a revolving line of credit?
After a lender approves a revolving line of credit, the borrower is assigned a specific credit limit based on credit score, income and credit history. The lender may agree to increase your maximum credit limit if you make consistent payments on the account.
When you make payments on a revolving line of credit, those funds become available to borrow again.
Three Types of Revolving Credit Accounts
1. Credit cards: This line of credit is primarily used to cover everyday purchases and to pay unexpected expenses. You often pay a higher interest rate on a credit card balance, but credit cards provide a lot of flexibility and can be used for
large and small expenses.
2. Home equity line of credit: Also known as a HELOC, home equity lines of credit generally offer lower interest rates than other forms of revolving credit because the money you borrow is secured by the equity in your home. HELOCs are good options
for borrowers who own significant equity in their home and want a sizable line of credit to cover larger expenses, like home repairs or renovations.
3. Personal line of credit: Like HELOCs, personal lines of credit offer the flexibility to withdraw as much - or as little - as you’d like, and you only pay interest on what you borrow. Personal lines of credit are often unsecured,
meaning they often have higher interest rates than HELOCs, but they can be used for almost any purchase.
Three Benefits of a Revolving Line of Credit
1. Up to a certain credit limit, you can repeatedly use the line of credit, as long as the account remains open and in good standing.
2. Flexibility ranks as a top advantage, as you can use a revolving line of credit for a wide variety of purchases.
3. Unlike other forms of credit, a revolving line of credit does not have a fixed number of payments.
Three Things to Consider Before Applying for Revolving Credit
1. Late fees and interest can add up for unpaid balances.
2. Depending on which type of revolving line of credit account you plan to open, we recommend making the following considerations. Before opening a new credit card, for example, we recommend budgeting for annual and transaction-related fees. With personal
lines of credit, we suggest reviewing origination fees. And for home equity lines of credit, be sure to budget for closing costs.
3. Credit history, type of account and transaction amount will factor into determining your interest rate.
Think a revolving line of credit is right for you? Get a free consultation from a First Merchants Bank lending expert today. 1.800.205.3464.
