Do you know that revolving account/credit can help or hurt your credit score? It all depends on how you use it. To help enlighten you more and help you make the most of a revolving account, we will tell you all that you need to know about the revolving account and how it works for you.
What is the Revolving Account?
A revolving account is an account that gives a borrower the leverage of borrowing money repeatedly up a set limit and pay it back over time. It is an account that gives you a financial haven for emergencies and helps you manage your money.
How Does Revolving Account Work?
With a revolving account, a credit limit is set, which is the maximum amount you can spend on that account. You can either choose to pay off the balance in full at the end of each billing cycle, or you can carry over a balance from one month to the next, or “revolve” the balance.
Note that when you revolve a balance, you’ll be required to make a minimum payment each month. The minimum payment may be a fixed amount, or a percentage of your total balance, whichever is higher. These specifics can be found in the fine prints of your revolving credit agreement. Also, borrowers get charged interest on the balance that is carried over from month to month. (With the exception of a credit card or line of credit that comes with a 0% interest introductory period.) Other fees may also apply such as annual fees, origination fees, or fees for missed or late payments.
Getting a Revolving Account
Revolving accounts are open for both individual and business customers. However, they need a standard credit application that considers a borrower’s credit history and debt-to-income. For the underwriting process, the underwriters determine if a borrower is eligible for approval as well the amount the lender is willing to lend. If a borrower is approved for a revolving credit account, the lender will have to provide a maximum credit limit and also the account interest rate terms.
How Do Revolving Accounts Affect Credit Scores?
As earlier stated, much like all types of credit, revolving credit accounts can either hurt or help your credit scores. It all depends on how you use them. For those who have little or no credit history, it will be best if you get a credit card and use it for small purchases. However, you will have to pay the bill in full and on time every month if you want to start building a good credit score.
One major factor in building your credit score is making on-time payments. You can meet your due dates, by setting up autopay to ensure you do not miss a payment.
You should also strive to pay your credit card balance in full every month. If you can’t achieve that, you aim at keeping the balance below 30% of your available credit. Since credit scores are quite sensitive to your credit utilization ratio, the amount of revolving credit you’re using relative to your total credit limits and a utilization ratio above 30% can have a negative impact on your credit score.
Opening and closing revolving accounts also have a way of affecting your credit score in different ways.
The idea of closing a credit card that you are no longer using might seem like a good idea. But before you take that route get this! When you close a credit card you are no longer using, it reduces the amount of credit you have available to you. It may also push your credit utilization ratio over 30%. Thus it might be best to keep the account open to help your credit score even if it has a zero balance.
Diversifying your credit mix:
This means having a mix of different types of credit in your credit score. This is also a factor, and it shows that you can manage various kinds of credit and can help you build a strong credit history.
Causing hard inquiries:
When applying for revolving credit, the lender will request your credit file from the credit bureaus. This will result in a hard inquiry on your credit report. Hard inquiries can cause a dent in your credit score even though usually only a few months. (The inquiry will stay on your credit report for two years.) Additionally, applying for several credit cards or loans no matter how tempting it sounds, has a way of hurting your credit score. This is because it suggests to credit scoring models like FICO that you’re in financial trouble. The only exception being when you’re rate shopping for a mortgage or other loan. If this is the case, the credit scoring models typically treat those inquiries as a single event.