What is revolving credit?

Revolving or open-ended credit is an agreement between a bank and a customer that allows the customer to borrow funds on an ongoing basis within an agreed spending limit.

How does revolving credit work?

Different types of revolving credit come with specific conditions, yet the overall concept is as outlined below:

• A bank or provider agrees to supply an individual or business with access to an agreed amount of funds.
• The user can make purchases up to this maximum credit limit, agreeing to pay it back over time with minimum monthly payments (or in full all at once).
• Variable or fixed interest accrues on the outstanding balance.

Buying on credit, such as with a credit card, can be a flexible way to pay. Revolving credit allows users to access funds as and when needed, without stipulating a specific spending purpose. As long as the minimum monthly amount is paid, the credit is replenished and usable.

It's important to understand that payment history on revolving credit accounts can impact an overall credit score. Using revolving credit responsibly helps to maintain a healthy credit profile.

Key features of revolving credit

Some of the main features of revolving credit include:

• Continuity. Revolving credit facilitates continuous borrowing and repayment within a set credit limit. If repayments are made on time, users can continue to access credit funds.
• Minimum payments. Users are usually obliged to cover a minimum payment on their revolving credit agreement to keep an account up to date (usually an agreed portion or percentage of the overall balance). Left unpaid, this can attract late fees, which may be added to the outstanding balance, potentially impacting credit scores and possibly leading the cardholder to go into excessive debt.
• Credit limit. Lenders typically offer a maximum credit limit, which is the highest amount the user can borrow or spend. This capacity may depend on a user’s existing credit score and may be increased over time if certain criteria is met.
• Available credit. This refers to the amount remaining on a line of credit before the maximum limit is reached (total current balance subtracted from the total credit limit).

Examples of revolving credit

Day-to-day revolving credit examples are credit cards and lines of credit, including personal lines of credit, home equity lines of credit (HELOCs), business lines of credit, and other arrangements.

Credit cards

Credit cards are a common and widely used form of revolving credit. Here, an agreement is made between a bank and a customer, and a maximum credit limit is set with specific minimum repayment conditions. Depending on how responsibly they’re used, credit card payments can positively or negatively affect credit ratings.

The PayPal Cashback Mastercard^® is an example of revolving credit.¹

Lines of credit

Banks offer lines of credit to customers in various forms. Lines of credit give borrowers access to a maximum agreed fund limit to be used on an ongoing basis.

Consider the below examples:

• Personal line of credit (PLOC). A PLOC offers users access to an agreed maximum credit limit that can be used for anything. These funds can be drawn via transfer to an individual’s bank account. Interest is typically variable and accrues on the balance spent, with minimum monthly payments required. Payment scheduling and fees may differ depending on the lender or institution.
• Home equity line of credit (HELOC). A HELOC gives users a line of credit backed by the current value of their home as collateral. The credit amount may be a percentage of the current house value, less the outstanding mortgage balance. Repayment amounts tend to vary, with interest rates commonly variable.
• Business line of credit. A business line of credit is a flexible ad-hoc loan offered to businesses that may require assets as collateral (secured) or without collateral (unsecured). Unsecured lines of credit tend to be lower than secured.
• Demand line of credit. A demand line of credit gives the lender the right to demand repayment of the entire loan and outstanding interest immediately at any time.
• Securities-backed line of credit (SBLOC). An SBLOC uses investment portfolio assets as collateral (rather than a home or property like a HELOC). SBLOC interest rates tend to be lower than other lines of credit.

Each credit line offers different variable or fixed interest rates, line of credit repayment conditions, potential fees, flexibility, and implications on credit scores.

Pros and cons of revolving credit

There are pros and cons to revolving credit. Flexibility and convenience are countered by potential negatives such as overspending, high interest rates, and negatively impacted credit history if the credit account is not kept in good standing.

Potential advantages of revolving credit

Some of the potential advantages of revolving credit include:

• Flexibility. Users can draw on funds anytime and borrow as needed.
• Convenience. In the event of emergencies, revolving credit can provide a convenient fallback, covering urgent bills and helping prepare for unexpected expenses.
• Positive credit history. When used responsibly, revolving credit may help credit scores.

Potential disadvantages of revolving credit

Some of the potential disadvantages of revolving credit include:

• Overspending. Access to funds may tempt users to make purchases beyond their means or ability to repay responsibly.
• Negative credit history. Defaulting on minimum payments or incurring late fees on revolving credit debt can hurt credit scores.
• High interest rates. Some arrangements may attract a higher revolving credit interest rate than other forms of lending. Balance transfer credit cards can be one way to help consolidate and lower interest charges.
• Potential excessive debt. Accumulated late fees and interest can leave the user in a damaging financial position.

Learn how to spend responsibly using credit.

Revolving credit with PayPal

PayPal offers revolving credit services to its customers, such as its PayPal Credit² product which includes:

• Fast access
• No annual fee³
• Purchase protection⁴
• PayPal-wide availability
• No Interest if paid in full in 6 months on purchases of $149 or more. Interest will be charged to your account from the purchase date if the balance is not paid in full within 6 months. Minimum monthly payments required. See terms.

Explore PayPal credit services for more information about how PayPal Credit works and other credit offerings from PayPal.