What is Revolving Debt?
At some point or another, almost everyone will have to deal with debt. We use the word debt to mean any amount of money owing, it’s an all encompassing term. However, it’s important to remember that there are several different kinds of debt, each of which typically needs to be dealt with in a specific way.
One of the more common types of debt is “revolving debt”. Which means that it has no fixed monthly payment in the same way that a car loan does. Because of this, revolving debt can lead to a lot of financial problems, if you’re not using it wisely.
True, revolving debt can be easy and convenient simply because there aren’t any fixed payments involved. Then again, that convenience and freedom can eventually land you in hot water with a lot of debt to pay off and potentially even some credit issues. Both of which can seriously hinder your financial future.
What Does Revolving Debt Mean?
When you use a credit account (for example a credit card or line of credit), pay it off in small amounts, then us it up again, it’s considered “revolving”. There is no reason to re-apply, you’ll always have access to a set limit as long as you continue to pay off any balance you might accumulate. These types of credit accounts also often have minimum monthly payments, this means you don’t need to pay off your balance in full, instead, you’ll simply have a pay a small percentage.
Here are some types of credit that are considered “revolving”:
- Credit Cards
- Home Equity Lines of Credit (HELOC)
- Personal Lines of Credit
Your Balance and Payments
Unlike a common loan, when it comes to revolving debt, the monthly payments are not a set amount. So, depending on how much you spend, your minimum monthly payments, like your interest costs, will go up and down. Because of this, it can be problematic when you’re trying to maintain an effective budget. So, if you’ve got a sizeable credit card bill, or if you’re not using your credit in a responsible manner, you could be in for financial problems in the near future.
In most cases, the minimum payment of your revolving debt, which you must make every month or be charged extra, is around 2.5% of the full amount shown on your statement. True, at first this percentage doesn’t look so costly. Then again, if you’ve been spreading out sizeable balances across multiple credit accounts, it adds up quickly, and you could find yourself struggling to pay off hundreds of dollars in revolving debt on a regular basis.
Does Canceling a Credit Card Negatively Affect Your Credit Score? Find out more.
Beware of High-Interest Fees
When it comes to revolving credit, it’s always the best idea to pay off the full amount of your bill, on time every month. However, if you aren’t able to pay the full amount, then it’s important to pay off more than the minimum payment amount by as much possible. The fact is that the more revolving debt you’re in, the more costly it will be to your finances, often because of the interest rates.
Remember, while making the minimum payment is an option to see that you don’t get charged a penalty, this shouldn’t be used as an excuse to only pay the minimum from now on. In fact, you’ll only be adding more revolving debt onto your plate, as interest fees will increase the amount you owe. So, if you manage to pay the full amount on your bill, every month like clockwork, you won’t gather any extra charges or penalties.
You’ll Be Paying For a High-Interest Rate
Interest rates are one of the most serious issues when it comes to revolving debt, especially with credit cards. With revolving debt, any interest rates involved are most likely going to be worse because you’re technically helping yourself to money using an account with no secure collateral involved. Unlike you would see with a mortgage, where your home can be seized as collateral if you fail to make your regular payments, nothing will be taken through an open credit account except more of your money. Because of this, you’ll be charged more in interest fees the more revolving debt you have.
If you’re only paying your minimum balance every month, you’ll end up trapped under a pile of debt, that will only get more unmanageable because whatever little money you’re putting towards your bill is just going to cover the interest fees rather than the debt itself. For this reason alone, if you’re looking to really start paying off your debts, it’s a good idea to begin with the ones that have the largest interest rates first. They’re definitely the most problematic for your finances.
Lastly, a good thing to know is that the interest rates you pay are also going to change based on the various ways that you’ll be dealing with your money. For instance, when you’re making purchases using revolving credit, you’ll probably have to pay a different rate than if you were making a balance transfer or getting a cash advance.
Always Make Sure To Pay On Time
True, it’s not advisable to only pay off the minimum monthly balance on your credit accounts, as you will indeed be charged interest. However, paying the minimum balance on time is much better than missing a payment completely. In fact, if you haven’t been making your payments on time, your credit score will definitely be affected in a negative way. On top if this, your interest rate is only going to grow and you’ll be charged a penalty with each missed payment. So, if you can’t afford to pay the full amount, paying at least the minimum is better than nothing.
Your Credit Accounts Will Have An Effect On Your Credit Score
All your credit accounts, revolving or not, affect your credit score. This might be a bit obvious but it’s still very important to know. It’s also important that you take into consideration the total amount of credit you have available to you and what percentage you current have used up. Credit utilization is one of the most important factors taken into consideration during the calculation of your credit score. It’s recommended that you only use 30% or less of the amount of credit accessible to you. However, if you’re having problems due to revolving debt, it’s best that you set your sights lower, and be using closer to 10% of your available credit.
Having Trouble With Your Debt?
It can be difficult to regain your financial stability when you’re trying to cope with your debt problems. If you’re currently struggling with revolving debt or any other type of debt, we can help. We offer a variety of debt relief solutions, get in contact with us today for more information about the options available to you.