Understanding the Basics of Revolving Credit: Exploring 3 Types

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Exploring 3 Types of Revolving Credit

Revolving credit is a type of credit that allows borrowers to access a certain amount of funds repeatedly, as long as they make regular payments. This type of credit is commonly used for everyday expenses and managing cash flow. There are three main types of revolving credit that individuals can consider: credit cards, lines of credit, and home equity lines of credit (HELOCs).

Credit cards are the most common form of revolving credit. They are issued by financial institutions and allow cardholders to make purchases up to a certain credit limit. Cardholders can choose to pay off the balance in full each month or make minimum payments and carry a balance. Interest is charged on the remaining balance, and the credit limit replenishes as the balance is paid off.

One of the benefits of using a credit card as a form of revolving credit is the convenience it provides. Cardholders can use their credit cards for online and in-store purchases, making it easy to manage expenses. Additionally, credit cards often come with rewards programs, offering cashback, travel points, or other incentives for using the card.

Lines of credit are another type of revolving credit that individuals can access. Unlike credit cards, lines of credit are not attached to a physical card. Instead, they are typically linked to a checking account or offered through a financial institution. With a line of credit, borrowers can withdraw funds up to a pre-approved credit limit.

Lines of credit offer flexibility, as borrowers can access funds as needed. They can be used for various purposes, such as covering unexpected expenses, making home improvements, or funding a small business. Interest is only charged on the amount borrowed, and borrowers have the option to make minimum payments or pay off the balance in full.

Home equity lines of credit (HELOCs) are a type of revolving credit that is secured by the borrower's home. HELOCs are often used for major expenses, such as home renovations, education costs, or debt consolidation. The credit limit is based on the borrower's equity in their home.

HELOCs typically have a draw period, during which borrowers can access funds, followed by a repayment period. During the draw period, borrowers can make interest-only payments or choose to pay off the principal as well. Once the draw period ends, borrowers must start repaying the principal and interest. It's important to note that if the borrower fails to make payments, they risk losing their home.