Revolving credit is a way of making credit available to a borrower with a sum of money in a special account opened by the lender. It is a special form of consumer credit and is governed by relevant regulations.
In direct contrast to installment loans, revolving credit does not work with a fixed number of payments, and good illustrations of revolving credits include credit cards. On the other hand, corporate revolving credit facilities are generally uitilized in the provision of liquidity for a firm’s daily activities.
Renewal of revolving credit occurs gradually as repayments by the borrower to the amount authorized by the agency and to the refunded part. This form of credit is usually accompanied by a credit card used in the network of affiliated businesses that accept the card.
Whenever this method has the advantage of flexibility, it is usually expensive, and can be an incentive to overuse even to the extent of over indebtedness, thus requires responsible account management.
The success of a revolving credit is dependent on significant demand and sustainable funding of small amounts. However, it has attracted criticism from various sections of society, including associations of consumers who called into question its role in the indebtedness of households.
The distinctive features of revolving credit include the fact that the borrower can make use or withdraw money equal to the set limit, the total sum of money accessible diminishes and increases in tandem with borrowing and repayment activities on one’s account. Users can utilize the credit persistently, and the borrower is expected to make payments on the basis of the amount used or withdrawn, plus interest.
The borrower of revolving credit can repay over a period of time via installments or in full. And in some instances, the borrower has to pay a nominal fee for any undrawn money in the revolving fund.
The credit is reconstitutable, in that it allows the borrower to dispose freely and continuously, a certain sum of money, and the amount available which is sometimes called the reserve is reconstituted each month.
Revolving credit is practiced through lines of credit (derived from the cash reserve which is granted either by check or transfer) and credit cards (association with a purchase card issued by registered department store or one issued by a financial institution)
As can be expected the amount of credit depends on income and current debt obligations among other things. The amount is calculated using the debt ratio, and the contract is limited to one year.