Summary of this article
Revolving credit allows flexible borrowing with interest charges.
Line of credit offers direct access to cash conveniently.
Choosing wisely prevents debt and strengthens financial control.
Revolving credit is a type of loan you can borrow again and again up to a predetermined limit. Credit cards are a common form of revolving credit. Let’s understand this with an example, assuming your credit limit is Rs 1 lakh. If you spend Rs 40,000, you will still have Rs 60,000 available for use. After you repay the amount you have borrowed, your available limit will increase again. Thus you owe interest only on what you borrow, not on the entire credit line.
The convenience provided by revolving credit makes it popular among borrowers for day-to-day spending. It also facilitates minimum payments, though these are subject to exorbitant interest charges. When you only pay the minimum payable amount, the outstanding amount rolls over and interest continues to accumulate. However, if used responsibly, revolving credit can assist in keeping monthly expenditure under check. On the other hand reckless borrowing can lead to users ending up in a debt trap.
Interest rates for revolving credit vary widely but generally fall between 10 per cent and 20 per cent annually, with some cases as low as 6 per cent or higher.
What Is a Line of Credit
A line of credit is also borrowing but in a different form. It is typically provided by banks as a personal line or as an overdraft facility against your account. Here again, you have a predetermined limit and can draw cash when required. You pay interest only on what you draw, not on the whole limit.
Take the example of a Rs 2 lakh line of credit and you withdraw Rs 50,000. Interest is levied only on that Rs 50,000 until such time as you repay. While revolving cards with reward points or cashback are common, most lines of credit don't offer them. They are more geared towards emergency expenses or business expenditure than retail purchases.
The average interest rate for a personal line of credit typically ranges from 9.3 per cent to 17.55 per cent, with some lenders offering rates as low as 2.25 per cent.
Key Differences Between the Two
The primary distinction between a line of credit and revolving credit relates to use and repayment. Revolving credit is more consumer-oriented and is used more for shopping, traveling, and monthly payments. It has benefits such as cashback rewards or points. A line of credit is more suitable for emergency usage with the easy availability of cash at the time required, without rewards.
Revolving credit pays back part of the sum and keeps rolling the balance. However with a line of credit the borrower has to make the repayment within a fixed period. Notably, borrowing is still allowed but only after the dues are settled. Interest-wise, credit cards tend to have a higher rate of interest than bank credit lines. This implies that a line of credit could be less expensive for borrowing more money, while credit cards are more suitable for small, recurrent transactions.
Impact on Your Finances
Both these products are crucial to understand in order to manage money effectively. Revolving credit, with proper discipline, can improve an individual’s credit score with timely payments. It also creates a spending record which can be used to monitor spending habits. Overuse or delayed payments, however, can damage credit health.
A line of credit, on the other hand, can serve as a fund in case of emergencies. It can prove to be useful in scenarios such as a sudden medical bill, college tuition payment, or business cash flow shortage. Since the interest rate is relatively less compared to revolving credit, it can prove to be a better option for planned short-term loans. However the loans must be repaid on time to avoid late fees and other charges.
Selecting What's Best for You
Choosing a line of credit or revolving credit depends on the borrower’s requirements. If you want flexibility to make your daily expenses and can pay bills on time, then revolving credit may be suitable. In case of necessity or for making a lump sum transaction during emergencies or for specific expenses, a line of credit is likely to be more useful. Both instruments are helpful for personal money management but need to be used carefully.
