Should You Get Revolving Credit or Line of Credit?
Before going to your bank to ask for funds, it is best to understand what kind of credit do you need. Often, you hear two things: revolving credit and line of credit.
Both are similar to an open-ended loan. Each offers purchase flexibility and payment flexibility. You can use them on an as-needed basis and pay off at your convenience. But what is the difference between them?
Explaining the basics of revolving credit
Getting revolving credit is like having a credit card. In fact, some banks call it a revolving line of credit. You receive a maximum credit limit that you can use for purchases.
For businesses, they often use revolving credit for expansion or as a safeguard in the event of cash flow problems. Meanwhile, individuals often use it for overdraft protection on demand deposits or checking accounts. Covering ongoing expenses, such as medical bills or house renovation bills, is another common function.
Pay your bills on time and your bank may reward you with an increase in your maximum credit limit. You can use the funds repeatedly as long as you do not exceed the maximum. In this way, revolving credit is much like a credit card. However, there is no set monthly payment and the interest accrues and is capitalized.
Understanding a line of credit
Revolving credit is a kind of credit line. There are non-revolving lines of credit, too. These have the same features as the former, but with one big difference. The available credit does not replenish after payments are made. It is a one-time arrangement, and when the line of credit is paid in full, the account is closed.
Important considerations in obtaining credit
Compared to traditional installment loans, revolving credit and a line of credit can be used for whatever purpose you have in mind. The payments are also irregular because you are not given a lump sum and immediately charged interest.
For people getting a revolving credit or line of credit, it is more about the ability to borrow funds in the future up to a certain amount. Interest will only be charged the moment you start using the line of funds.
To determine what kind of credit is the best, assess your needs and determine whether you require an on-going source of funds or just a one-time arrangement. Assess your ability to pay as well so that you do not go into debt and have problems with your revolving credit or a simple line of credit.