Revolving credit: what it is – Dictionary of Economics

Definition of revolving credit

Revolving credit can be defined as a line of credit granted by a financial institution to a client, with an established limit that can be used for a certain period of time.

A maximum amount is granted that you can use for a fixed time, when you need to dispose, the maximum limit granted will be lowered in the amount used, and you can also make deposits, until you restore the amount used.

The user who uses this type of credit is the one who establishes the installment that he wishes to pay every month, an amount made up of part of the amount used plus the interest generated by the amount drawn down, although the financial institution usually establishes a monthly minimum of between 3% and 5% of the amount drawn.

This modality is very common in credit cards, being used to make extraordinary expenses such as trips, non-recurring purchases, etc.

Supplements the personal loan. The limit granted ranges between 500 euros and 6,000 euros. The client can use the granted limit and will return the amount provided with a fixed monthly fee for a fixed period.

When requesting this type of card, it is important to pay attention to the interest rate. The financial entity usually indicates the monthly rate, together with the opening commission, so in order to compare several offers, the Annual Equivalent Rate (APR) must be taken into account, which is what will determine which of the options of the different entities finance is the cheapest.

Advantage

• Once the credit card has been authorized with a certain limit, the customer can have the amount they need at any time, without exceeding the amount granted.

• Flexibility in payment, the client chooses the monthly amount to pay.

drawbacks

• The interest rate that financial institutions charge is high.

• It can generate high commissions for opening and unavailability of the granted limit.

Example of a revolving credit card

Revolving credit card fixed monthly installment modality

A client of a financial institution requests a revolving credit card in the month of January with a limit of 2,000 euros and with a fixed payment method of 66.43 euros per month, a fixed annual nominal interest rate of 12% for a term of 3 years.

Once granted by the financial entity, the user makes a withdrawal for the maximum granted limit of 2,000 euros in the month of February of the same year, there is no opening commission.

As of the following month, March, the user will have to pay the financial institution the fee of 66.43 euros per month for the next three years.

In this first installment the client will pay:

• 20 euros of interest

• 46.43 euros of principal

The installment of 66.43 euros will remain fixed during the three-year period if no future withdrawal is made, although in successive installments, the calculation of interest will be made taking into account the amount pending repayment, so in each of the following payments made by the client, the interest will progressively decrease and the principal will increase.

As the debt is cancelled, the client will be able to dispose of the corresponding amount of principal paid for the purposes that he deems, always with the initially set limit of 2,000 euros.