When talking about credit, two major types stand out, namely revolving and non-revolving credit. A good understanding of each determines the application in various financial situations and how they affect one’s credit rating and journey in the long term.
What is revolving credit?
The first category is revolving credit which is a type of credit that can be used at a certain limit repeatedly for as long as the account is operational and timely payments are made. The three factors of available credit amount, balance, and minimum repayment fluctuate which depend on the payments made against the purchases using the account in the case of revolving credit. There is a component called the cleanup requirement under revolving credit where the borrower is asked to clear that balance down 20 rupees in a specific time before operations can be renewed and for the same reason it is also referred to as Evergreen Loans. The rate of interest is determined depending on the current outstanding balance and may be added to the main balance periodically as long as it is not completely paid. The normal period for payment is once a month. The two common instruments and the revolving credit cards and lines of credit used by organizations and institutions.
Revolving credit works in a very simple manner. As long as the borrower sticks to the terms of his credit borrowing with the institution, they can be flexible with their operations.
Take a scenario where an amount of Rs. 10,000 credit limit is available on a credit card. The borrower makes purchases of rupees 1000 and has available credit left of rupees 9000. He can either choose to completely balance out the thousand rupees by paying it or make a minimum payment which is determined under the billing statement. The third option of payment of an amount between the minimum payment and the full balance is also available. After the minimum payment is made it will be carried over to the main credit amount balance and the new billing cycle will start there. A penalty called the finance charges will be applied should the borrower fail to repay the credit borrowed in a specified period.
What is non-revolving credit?
Loans such as auto loans and student loans are examples of non-revolving credit. These can’t be reused once they are paid off. A predetermined interest rate on a fixed repayment schedule is placed and consists of monthly payments. These have low-interest rates and are associated with lower risk. They have less flexibility and are rigid with calculations.
When compared, non-revolving credit is good when borrowing a large sum of money to keep the borrower in check with the repayment schedule of the interest rate and a good track of the credit to be repaid. Revolving credit can be used for small purchases, daily use and is flexible. Due to the risk involved, revolving credit is something that banks often limit the amount on. Both types of credit are relevant and useful in their situations provided the borrower has healthy financial habits. The fine print contains the terms and conditions of borrowing along with the cost is something that needs to be paid grave attention to before entering into any sort of debt contract.