Definition
A Revolving Charge Account is a financial account that permits the holder to borrow funds repeatedly up to a certain credit limit. Instead of having a set term for repayment, the account continues to remain open as long as the borrower makes at least the minimum required payments. The outstanding balance does not need to be reduced to zero each month, allowing for ongoing access to credit.
Examples
- Credit Cards: Most credit cards are revolving charge accounts. Cardholders can make purchases up to their credit limit and pay off a portion or the full balance each month, allowing them to reuse the credit.
- Home Equity Lines of Credit (HELOCs): HELOCs provide homeowners with the ability to borrow against the equity of their home. Payments made on these accounts can reduce the balance, thus allowing for further borrowing.
- Retail Store Accounts: Many retail stores offer revolving charge accounts to their customers, who can make purchases and pay them off over time while continuing to shop up to their credit limit.
Frequently Asked Questions
What is the difference between a revolving charge account and a term loan?
A revolving charge account allows for repeated borrowing and repayments up to a credit limit, with the balance not needing to be paid off entirely each month. In contrast, a term loan involves borrowing a fixed amount with fixed repayment schedules over a specified period.
How do interest rates work on revolving charge accounts?
Interest rates apply to the unpaid balance of a revolving charge account. If the balance is not paid in full by the due date, interest will be charged on the remaining amount.
What happens if I miss a payment on my revolving charge account?
Missing a payment could result in late fees, increased interest rates, and potential damage to your credit score. Persistent missed payments may lead to the account being closed and the balance demanded to be paid in full.
Can I increase the credit limit on my revolving charge account?
Yes, many financial institutions allow you to request a higher credit limit. Approval is typically based on your credit history, income, and current debt levels.
Is a revolving charge account suitable for everyone?
While revolving charge accounts are flexible, they require disciplined financial habits. Mismanagement can lead to debt accumulation and high-interest charges, making them unsuitable for individuals prone to overspending.
- Credit Limit: The maximum amount that can be borrowed on a revolving charge account.
- Minimum Payment: The minimum amount that must be paid each billing cycle to keep the account in good standing.
- Annual Percentage Rate (APR): The yearly interest rate charged on the unpaid balance.
- Utilization Ratio: The percentage of the credit limit that is being used, which affects your credit score.
- Credit Score: A numerical expression representing the creditworthiness of an individual, influenced by their utilization ratio and payment history.
Online References
- Investopedia: Revolving Credit
- Wikipedia: Revolving Credit
- The Balance: Understanding Revolving Credit Accounts
Suggested Books for Further Studies
- “Personal Finance For Dummies” by Eric Tyson
- “Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score” by Anthony Davenport
- “The Total Money Makeover: A Proven Plan for Financial Fitness” by Dave Ramsey
Fundamentals of Revolving Charge Account: Finance Basics Quiz
### What is a revolving charge account?
- [x] An account that allows continuous borrowing up to a credit limit as long as minimum payments are made.
- [ ] A fixed-term loan that must be paid in preset installments.
- [ ] A savings account with periodic interest credits.
- [ ] An investment account with variable returns.
> **Explanation:** A revolving charge account allows for continuous borrowing as long as the holder stays within the credit limit and meets the minimum payment requirements.
### What financial product is an example of a revolving charge account?
- [x] Credit Card
- [ ] Mortgage
- [ ] Certificate of Deposit (CD)
- [ ] Auto Loan
> **Explanation:** Credit cards are classic examples of revolving charge accounts where users can borrow, repay, and borrow again up to a credit limit.
### What happens if you miss a payment on a revolving charge account?
- [x] You may incur late fees, higher interest rates, and damage to your credit score.
- [ ] Nothing happens; you do not need to worry.
- [ ] The entire credit limit increases automatically.
- [ ] You receive a bonus reward from your financial institution.
> **Explanation:** Missing payments can lead to late fees, increased interest rates, and negative impacts on your credit score.
### What does the term 'credit limit' refer to in a revolving charge account?
- [ ] The minimum payment required each month.
- [x] The maximum amount that can be borrowed on the account.
- [ ] The total amount of interest accrued annually.
- [ ] The minimum balance required to keep the account open.
> **Explanation:** The credit limit is the maximum amount that can be borrowed on a revolving charge account.
### How do interest rates apply to revolving charge accounts?
- [ ] They are applied as a fixed annual fee regardless of the balance.
- [x] They are charged on the unpaid balance.
- [ ] They only apply if the balance is reduced to zero.
- [ ] They apply to newly borrowed amounts but exempt existing balances.
> **Explanation:** Interest rates apply to the unpaid balance in a revolving charge account, making it crucial to understand how they impact your outstanding debt.
### Can the credit limit of a revolving charge account be increased?
- [x] Yes, by request and depending on creditworthiness.
- [ ] No, it is set permanently at account opening.
- [ ] Yes, but only every five years.
- [ ] No, only decreases are allowed.
> **Explanation:** Many financial institutions allow increases in the credit limit based on the borrower's credit history and financial situation.
### What is the utilization ratio in a revolving charge account?
- [ ] A ratio that compares annual fees to credit limit.
- [ ] A ratio that shows interest accrued to payments made.
- [x] A ratio of the amount used to the total credit limit.
- [ ] A ratio of monthly payments to available balance.
> **Explanation:** The utilization ratio measures the proportion of credit being used compared to the total credit limit and affects your credit score.
### Who typically provides home equity lines of credit (HELOCs)?
- [ ] Credit card companies
- [x] Financial institutions like banks and credit unions
- [ ] Retail stores
- [ ] Insurance companies
> **Explanation:** Home equity lines of credit are usually provided by financial institutions such as banks and credit unions.
### What is another common name for a retail store revolving charge account?
- [ ] Savings account
- [ ] Fixed loan account
- [x] Store credit card
- [ ] Money market account
> **Explanation:** Retail stores often offer revolving charge accounts, commonly referred to as store credit cards.
### Why should individuals manage their revolving charge accounts carefully?
- [ ] To receive automatic limit increases.
- [x] To avoid debt accumulation and high interest charges.
- [ ] To eliminate the need for a credit score.
- [ ] To increase fixed-term loans.
> **Explanation:** Proper management of revolving charge accounts helps avoid excessive debt and high interest charges, ensuring financial health and stability.
Thank you for exploring the fundamentals of revolving charge accounts and challenging yourself with our quiz questions. Strive to manage your finances wisely!
