Revolving Credit Limit

It is said that in the United States, only 40% of individuals pay their bills and credit card debts as per schedule. The rest pay heavy interest rates and sometimes this even leads to bankruptcy or complete dissolution of certain businesses and there isn't much you can do after bankruptcy, is there? Before proceeding to revolving credit limit, let us read a little on revolving credit or revolving line of credit, which basically means the same, and is based on the principle of buying now and paying later.

What is a Revolving Credit?

Revolving credit is a form of short term loans, where a bank or financial institution gives you a certain amount of loan money (credit) which you have to pay as and when you use it. It is an open-ended credit where the interest rates might change and the money can be used for any purposes of your choice. This is a tad different from closed-end credit where you have to pay fixed installments, there are fixed interest rates and the purpose for borrowing is also fixed, such as home loans. Apart from individuals, even companies and industries apply for revolving credit.

What Does Revolving Credit Limit Mean?

A Revolving credit limit, is basically the credit limit up to which you can borrow. This figure might change depending upon your amount and interest dues. If the bank lends you credit with a limit of $1000, this is the amount up to what you can spend. Not more. It is called so, because it keeps on changing depending on how much you use and how much you pay. You need to give back what you take, to take more. If you have a very good credit history, the bank or finance institution might even consider increasing your limit.

How to Calculate Revolving Credit?

If you are wondering how revolving credit works, this is perhaps the easiest example to explain and understand. Suppose your revolving credit limit is $5,000. You make purchases of $3,000. Your limit now stands at $2,000. Then, you make a payment to the bank of $1,000. After this your credit limit stands at $3,000. If you don't pay in time, you are charged a specific amount of interest.

Examples:

Credit limit: $1,000
Purchases made: $500
Made payment to the bank: $250

After this, you credit limit is $750 [$500 (pending limit) + $250 (payment made)]

Now, you don't make the outstanding payment of another $250 in the stipulated time. You are charged interest on that depending upon the decided interest rates. This due amount keeps on increasing due to added interests and eventually you have to pay more than the worth of those purchases. This increase in dues is the reason why it is advised to pay your debts on time. However, you should consider checking and rechecking your revolving credit plans with your company before keeping any dues and while paying them too. This was just an example and the rates mentioned are not standard.

Now that you know what this limit means, you can keep your credit scores in check and pay your bills in time. Maintaining a good revolving credit limit credit score is very important as having a good credit history will help you a lot in future while applying for car loans. The figures and methods of payment differ from company to company and it is advisable that you opt for lower credit limits so you spend less.