Revolving Credit

Revolving Credit Commercial Banking Consumer Banking Credit Line Financial Charge Banking
Revolving credit is a financial arrangement where a lender provides funds up to a pre-approved credit limit, which the borrower can repeatedly use, repay, and use again. Common in both commercial and consumer banking, revolving credit helps businesses manage working capital and allows consumers flexible access to funds.
On this page

Revolving Credit

Definition

Revolving credit is a financial arrangement between a lender and a borrower that provides a flexible borrowing limit, which can be used and repaid repeatedly. This arrangement allows the borrower to access funds up to a specified maximum amount, and as repayments are made, funds become available to borrow again under the same terms. Revolving credit is commonly used in both commercial and consumer banking.

In Commercial Banking

In commercial banking, revolving credit is a contractual agreement between a bank and its customer (usually a business), where the bank agrees to make loans up to a specified maximum for a specified period. As businesses repay portions of the loan, the repaid amounts become available to borrow again, facilitating business cash flow management.

In Consumer Banking

In consumer banking, revolving credit often refers to credit card accounts or other lines of credit that require monthly payments of less than the full amount due. The balance carried forward from one period to the next is subject to financial charges or interest.

Examples

  1. Credit Cards: A common type of revolving credit in consumer banking. Consumers can make purchases up to their credit limit, repay part of the balance, and use the available credit again.

  2. Business Line of Credit: A bank offers a business a line of credit for day-to-day operations. The business draws funds as needed, repays them over time, and repeatedly accesses the available credit.

Frequently Asked Questions (FAQs)

What is the primary difference between revolving credit and installment loans?

  • Answer: Revolving credit allows borrowers to use funds up to a credit limit repeatedly and repay it monthly, whereas installment loans provide a lump sum that must be repaid in fixed periodic payments over a specified term.

How is interest calculated on revolving credit?

  • Answer: Interest on revolving credit is usually calculated based on the average daily balance carried on the account during the billing period.

Can revolving credit affect my credit score?

  • Answer: Yes, the usage, repayment history, and outstanding balance of revolving credit accounts can significantly impact your credit score.

What happens if I exceed my credit limit on a revolving credit account?

  • Answer: Exceeding your credit limit can result in over-limit fees, higher interest rates, and potential negative impacts on your credit score.

Is there a difference between a revolving credit facility and a line of credit?

  • Answer: While often used interchangeably, a revolving credit facility typically refers to a borrowing arrangement provided to businesses, whereas a line of credit can be available to both consumers and businesses and does not necessarily imply a repeated borrowing feature.
  • Credit Limit: The maximum amount that a borrower can use from a revolving credit account.
  • Financial Charge: Interest or fees charged for carrying a balance on a revolving credit account.
  • Installment Loan: A loan that is repaid in fixed, regular payments over a specified period.
  • Credit Utilization Ratio: A ratio representing the amount of revolving credit being used, relative to the total credit available.

Online References

Suggested Books for Further Studies

  • “The Basics of Understanding Financial Statements: Learn How to Interpret Financial Statements and Analyze Financial Ratios” by Mariusz Skonieczny
  • “Credit Analysis and Lending Management” by Milind Sathye
  • “Consumer Credit and the American Economy” by Thomas A. Durkin, Gregory Elliehausen, Michael E. Staten, and Todd J. Zywicki

Fundamentals of Revolving Credit: Banking Basics Quiz

### What is the key feature of revolving credit in terms of borrowing? - [x] Borrowers can use, repay, and reuse the credit up to a limit. - [ ] Borrowers receive a fixed lump sum to repay over a set term. - [ ] The credit cannot be reused once repaid. - [ ] It requires a single repayment at the end of the term. > **Explanation:** Revolving credit allows borrowers to repeatedly borrow, repay, and use the credit up to a pre-set limit. ### How is interest on revolving credit usually calculated? - [ ] Based on the original loan amount. - [ ] Based on yearly income. - [x] Based on the average daily balance. - [ ] Based on credit score. > **Explanation:** Interest is typically calculated based on the average daily balance of the account over the billing cycle. ### Which of the following is NOT an example of revolving credit? - [ ] Credit Cards - [ ] Business Line of Credit - [x] Mortgage Loan - [ ] Home Equity Line of Credit (HELOC) > **Explanation:** A mortgage loan is an installment loan with fixed payments over a term, not revolving credit. ### What generally happens if a borrower exceeds the credit limit on a revolving credit account? - [ ] No penalties are incurred. - [x] Fees and higher rates may be charged. - [ ] The account is permanently closed. - [ ] The borrower receives more credit automatically. > **Explanation:** Exceeding the credit limit can result in fees, increased interest rates, and potential harm to the credit score. ### Do revolving credit accounts affect your credit score? - [x] Yes - [ ] No - [ ] Only if the limit is exceeded - [ ] Only if the account is closed > **Explanation:** Revolving credit accounts impact credit scores through usage, repayment history, and balance. ### What is one advantage of revolving credit for businesses? - [x] It aids in managing cash flow by providing easy access to funds. - [ ] It requires no repayment. - [ ] The interest rates are fixed regardless of market changes. - [ ] It improves credit scores instantly. > **Explanation:** Revolving credit helps with cash flow management by providing flexible access to funds. ### What is a common fee associated with consumer revolving credit accounts if balances are carried forward? - [ ] Service fee - [ ] Origination fee - [x] Finance charge - [ ] Closing fee > **Explanation:** Financial charges or interest are typically applied to balances that are carried forward. ### Is a credit card considered an installment loan? - [ ] Yes - [x] No - [ ] Only in certain cases - [ ] Only when the balance is paid in full > **Explanation:** Credit cards are an example of revolving credit, not an installment loan. ### Which term relates most closely to revolving credit regarding usage? - [ ] Lump sum - [ ] One-time - [x] Repeated - [ ] Deferred > **Explanation:** Revolving credit allows repeated usage up to the credit limit. ### What does a high credit utilization ratio indicate? - [x] A high amount of available credit is being used. - [ ] A low amount of available credit is being used. - [ ] Credit balances are paid off. - [ ] The credit limit is increasing. > **Explanation:** A high credit utilization ratio signals that a significant proportion of the available credit is in use, which can impact credit scores.

Thank you for exploring revolving credit with us and tackling our insightful quiz questions. Mastering this fundamental financial concept is crucial for both personal and business fiscal responsibility!

Wednesday, August 7, 2024
Revolving Fund
Revolving Charge Account
Facility January 1, 1
Revolving Bank Facility (Standby Revolving Credit) January 1, 1
Revolving Credit January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.