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Revolving Line of Credit

A revolving line of credit is a commitment from a lender to make available to a borrower a certain amount of credit. As each purchase or advance is made by the borrower, the amount is debited from the amount available. As it’s repaid that amount becomes available again. A credit card is a good example of the way a revolving line of credit works.

A revolving line of credit likely is so named because the available credit is continually fluctuating upwards and down. When funds are used (or borrowed) available credit decreases. When funds are repaid, available credit increases up to the maximum.

Those that issue revolving lines of credit do so with the intention of making a profit. The profit each makes is derived primarily from the interest rate charged for using the credit. Depending on the issuer and also on the borrower’s credit history, the interest rate charged will vary and it can fluctuate according to the terms outlined by the issuer.

Unlike an installment loan (such as a mortgage or car loan), when you make purchases against a revolving line of credit, you won’t always have to repay the same amount each month. You’ll have a minimum amount due each month, but if you have the funds, you can make as large a payment as you want. You can even repay the balance in full.

Any amount paid over and above the amount that you’re charged as interest goes directly towards paying down the principle. Ideally, that should be your goal. By doing so, you will pay less in interest over time and you’ll increase your available credit.

Your credit history has a lot to do with the terms an issuer will offer on a revolving line of credit. If you have proven that you can manage your finances – you don’t overextend yourself and you always make your payments on time – you’ll find that over time, the limit on your revolving line of credit may increase. You may also be able to negotiate more favorable terms such as switching from a variable rate of interest to a fixed rate.

Failure to manage your finances will have repercussions, though. The details of each of your revolving line of credit-type accounts appear on your credit history so if you make payments late or if your balance to available credit ratio is too high, your credit score will likely take a tumble.
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