When it comes to borrowing money, there are two main types of credit that people use- revolving credit and non-revolving credit. These two work in different ways. The more you understand them, the better you can manage your money. Whether you are using a credit card or taking out a personal loan, you must know the difference between revolving and non-revolving credit.
So, read on to learn about both types of credit, how they affect your credit score and which one suits your needs best.
What is Revolving Credit
Revolving credit is a type of short-term credit that allows borrowers to borrow from a pre-set limit and pay it back at a later date. In contrast to traditional loans, revolving credit is offered on an as-needed basis. Credit cards and personal lines of credit are examples of revolving credit. They can be used for all kinds of expenses like rent, utility bills, and food, among other things.
What is the Effect of Revolving Credit on our Credit Score?
Revolving credit can have a big impact on your credit score. One important factor is the credit utilisation ratio, which is how much credit you are using compared to your total credit limit. For example, if your credit limit is ₹50,000 and you have spent ₹40,000, then you are using 80% of your available credit, which is considered high. Using too much of your credit limit can lower your credit score. As per experts, you should usually keep your usage below 30%. This means if your credit limit is ₹50,000, it is better to keep your spending below ₹15,000 to maintain a good credit score. Moreover, if you pay your credit card bill on time, you can build a healthy credit score.
What is Non-Revolving Credit
On the other hand, non-revolving credit is the most common type of credit. When you get a loan that has a fixed repayment tenure, it is considered non-revolving credit. This type of credit includes home loans, personal loans, car loans, etc. This type of credit is helpful for people who need a fixed amount of financing at a certain point in time. These are good for people who know exactly when they need the credit and don’t need to change their repayment plan. It’s also a good option for those looking for a short-term credit solution since it’s often easy to get approved.
Revolving vs. Revolving Credit (Key Differences explained)
| Feature | Revolving Credit | Non-Revolving Credit |
|---|---|---|
| Definition | A type of credit where you can borrow money, pay it back, and borrow again up to a set limit. | A one-time loan where you get a fixed amount of money and pay it back over time. |
| How much you can borrow? | You can borrow any amount within the credit limit. | You get all the money upfront. |
| Flexibility | Very flexible as you can borrow and repay as much as you need within your limit. | Less flexible |
| Repayment | You can pay a minimum amount each month, and if you have a balance, you can carry it over to the next month. | You have to make fixed monthly payments until the entire loan is paid off. |
| Examples | Credit cards, home equity lines of credit (HELOC), personal lines of credit. | Personal loans, car loans, home loans, and student loans. |
| Impact on credit score | Using too much of your limit can damage your score. | Your score is mainly affected by whether you make payments on time and how much of the loan is left to pay. |
| Interest Rates | Interest is charged on any balance you carry over from month to month. | The interest rate is usually fixed for the entire loan. |
| Best for | Everyday spending, emergency expenses, and when you need flexible access to funds over time. | Big, planned purchases like buying a car, a house, or paying for school. |
Which One Should You Choose?
Revolving credit is great if you want flexibility. Credit cards and lines of credit allow you to borrow as needed. This is helpful for everyday expenses or unexpected emergencies where you are not sure exactly how much money you need.
Non-revolving credit works best for bigger, planned purchases like buying a car or home. You know exactly how much you need, and you will have a clear repayment plan with fixed monthly payments.
FAQs
1.What is revolving credit?
Revolving credit allows you to borrow money up to a limit, repay it, and borrow again as long as you stay within the credit limit. A credit card is a common example of this.
2.What is non-revolving credit?
Non-revolving credit is a type of loan where you borrow a set amount once and repay it over time with fixed monthly payments. Once you repay the loan, the account is closed.
3.What are some common examples of non-revolving credit?
Common examples of non-revolving credit include:
- Personal loans
- Auto loans (car loans)
- Home loans
- Student loans
4.What are some common examples of revolving credit?
Common examples of revolving credit include:
- Credit cards
- Lines of credit
- Retail store cards
5.Which type of credit is better for building credit scores?
Both revolving and non-revolving credit can help you build your credit score if you are able to manage them well. Revolving credit, like credit cards, can affect your score faster due to factors like credit usage. However, if you make payments on time for both types of credit, then you can certainly improve your credit score.
