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  • The Difference between Revolving Credit and Line of Credit Pt 1

May 10, 2019 / By Jared Cohen

The Difference between Revolving Credit and Line of Credit Pt 1

Revolving credit and lines of credit are both financing arrangements made between persons or businesses, and money-lending establishments. The lender gives access to funds which the borrower can use as they wish or in a way that matches the needs of their business, in much the same way as with a flexible and open-ended loan. The term “revolving line of credit” is actually a loan, but in contrast to most typical loans, it comes with the provision that the account does not close when its balance drops to nil. The revolving account tends to stay open as well as available for use, up to such time as the consumer or lender opts to close it.

Two features make both options particularly attractive to borrowers: the flexibility with regards to purchasing and payment. Depending on the line of credit terms, one can use it as and when required, and pay it off when convenient. To stay safe though, it bears understanding how each works, and this can be done by looking at relevant examples. Both work similar to a credit card scheme, but with a notable difference.

Revolving Credit

This type of credit line is also extremely similar to the typical card scheme. The lender informs the borrower of a credit limit – the maximum amount which they can use to purchase something in any single instance. Typically, this option is used by the average guy to buy the goods he needs.

Now, let us understand how revolving balance works with an example.

An Example of Revolving Payment Balance

If a person named Michael has a card with $10,000 as the credit limit, he can spend $10,000 on services or products. If Michael bought something for 1,000 dollars, he would get a bill for that amount at his billing cycle’s end. The bank offers some different repayment options to him. He can write a $1,000 check and pay before his grace period ends, and avoid paying any finance charges to the card issuer. He can also choose to make either the minimum monthly payment required by his bank, or anything above that. If he chose to pay $400 for instance, he would be carrying the remaining $600 over to the subsequent billing cycle. Interest would apply on that, and he would get a bill inclusive of that extra charge.

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