when a borrower is approved for revolving credit the bank or financial institution establishes a credit limit that can be used over and over again all or in part a credit limit is the maximum amount of money a financial institution is willing to extend to a customer seeking funds 
revolving credit is generally approved with no date of expiration the bank will allow the agreement to continue as long as the account remains in good standing over time the bank may raise the credit limit to encourage its most dependable customers to spend more 1borrowers pay interest monthly on the current balance owed because of the convenience and flexibility of revolving credit a higher interest rate typically is charged on it compared to traditional installment loans revolving credit can come with variable interest rates that may be adjusted the costs of revolving credit vary widely lenders consider several factors about a borrower s ability to pay before setting a credit limit for an individual the factors include credit score current income and employment stability for an organization or company the bank reviews the balance sheet income statement and cash flow statement 3revolving credit examplescommon examples of revolving credit include credit cards home equity lines of credit helocs and personal and business lines of credit credit cards are the best known type of revolving credit however there are numerous differences between a revolving line of credit and a consumer or business credit card first there is no physical card involved in using a line of credit as there is with a credit card lines of credit are typically accessed via checks issued by the lender second a line of credit does not require the customer to make a purchase it allows money to be transferred into a customer s bank account for any reason without requiring an actual transaction using that money this is similar to a cash advance on a credit card but does not typically come with the high fees and higher interest charges that a cash advance can trigger types of revolving creditrevolving credit can be secured or unsecured there are major differences between the two a secured line of credit is guaranteed by collateral such as a home in the case of a heloc unsecured revolving credit is not guaranteed by collateral or an asset for example a credit card unless it is a secured credit card which does require the consumer to make a cash deposit as collateral a company may have its revolving line of credit secured by company owned assets in this case the total credit extended to the customer may be capped at a certain percentage of the secured asset for example a financial institution may set a credit limit at 80 of a company s inventory balance if the company defaults on its obligation to repay the debt the financial institution can foreclose on the secured assets and sell them to pay off the debt 4because unsecured credit is riskier for lenders it typically has higher interest rates advantages and disadvantages of revolving creditthe main advantage of revolving credit is that it allows borrowers the flexibility to access money when they need it many businesses small and large depend on revolving credit to keep their access to cash steady through seasonal fluctuations in their costs and sales as with consumers rates for business lines of credit vary widely depending on the credit history of the business and whether the line of credit is secured with collateral and like consumers businesses can keep their borrowing costs minimal by paying down their balances to zero every month 5revolving credit can be a risky way to borrow if not managed prudently a significant part of your credit score 30 is your credit utilization rate a high credit utilization rate can have a negative impact on your credit score most credit experts recommend keeping this rate at 30 or below 1revolving credit vs installment loanrevolving credit differs from an installment loan which requires a fixed number of payments including interest over a set period of time revolving credit requires only a minimum payment plus any fees and interest charges with the minimum payment based on the current balance revolving credit is a good indicator of credit risk and has the potential to impact an individual s credit score considerably installment loans on the other hand can be viewed more favorably on an individual s credit report assuming all payments are made on time revolving credit implies that a business or individual is pre approved for a loan a new loan application and credit reevaluation do not need to be completed for each instance of using the revolving credit 1also revolving credit is intended for shorter term and smaller loans for larger loans financial institutions require more structure including installment payments in preset amounts 