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Knowing The Difference Between Revolving Credit And Non-Revolving Credit

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Knowing The Difference Between Revolving Credit And Non-Revolving Credit

There are two different types of credit that you should be aware of: non-revolving and revolving credit. Knowing what the differences are is essential to understanding the effect it has on your long-term credit and which one to use in a variety of financial situations.

What Is Revolving Credit?

Revolving credit is what you can repeatedly use up to a set limit. As long as you pay on time, and the account is open, the revolving credit is accessible. The revolving credit, available credit, minimum payment, and the balance are all affected by the purchases and payments that are made.

If you have revolving credit, you can choose to pay off the amount immediately, or over months by paying a minimum payment. If you want to pay off the balance month by month, then you will likely incur interest, which increases the amount you have to pay.

Therefore, if you were to get the Sapphire Preferred credit card from Chase (NYSE: JPM), you might have a $10,000 credit limit. That means you can make any purchases you want, as long as you don’t go over that set limit and make the minimum required payments on time.

An example of this would be if on the first month you spend $2,000 and you would have an available balance left of $8,000. You can either choose to pay off the amount in full or pay off just the minimum payment of $200. If you wish to pay off only the minimum payment, your revolving credit would be $8,200 for month two. If during month three you send in the entire amount, your revolving balance would be back up to $10,000.

What Is Non-Revolving Credit?

Non-revolving credit is credit that can’t be used again once it has been paid off. One example is an auto loan or student loan; once you have paid off the amount, you don’t get that money back. When you borrowed the money, you agreed to a payment plan and a fixed interest rate. Payments must be sent every month according to the agreed-upon schedule.

Non-revolving credit will often have a lower interest rate because there is a lower risk related to this type of product. Usually, there is collateral tied together to the loan that the lender can take if you don’t make timely payments. For example, if you don’t pay your auto loan, the lender can repossess your car. Once you’ve paid off the non-revolving credit, that account will be closed. A new application will have to be filed if you want additional funds.

An advantage of non-revolving credit is that you often have more purchasing power because you can be approved for higher loan amounts compared to revolving credit.

When To Use Each

Both revolving and non-revolving credit is useful in different situations. Before committing to either type of credit, make sure to read the terms and conditions carefully and adhere to the repayment agreement so your credit score isn’t damaged.

MoneyLion has entered into a compensation arrangement with Benzinga under which MoneyLion pays a fee for marketing and advertising services. MoneyLion does not have editorial control over the content of this material.

Posted-In: non-revolving credit revolving creditEducation Personal Finance General Best of Benzinga

 

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