- Written By: Malcolm Tatum
- Edited By: Bronwyn Harris
- Last Modified Date: 03 October 2014
- Copyright Protected:
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Also sometimes known as a revolving credit line. a revolving line of credit is an agreement by a lender or creditor to allow a client to borrow up to a certain amount, with the amount borrowed repaid according to terms and conditions outlined in the lending agreement. As a portion of the debt is repaid, the client has access to whatever amount of the credit line that is not currently in use. Typically, the client is assessed a specified rate of interest on the current outstanding balance of the credit line, with that interest rate not changing unless the client misses making minimum payments on time.
One of the easiest ways to understand a revolving line of credit is to consider the process used by credit card providers. Applicants are granted a maximum amount that they can charge on the account. That maximum is in fact the amount of their line of credit. As the card is used to make purchases, the issuer deducts the amount of those purchases from the current credit limit on the line of credit. For example, if the card has a current credit limit of $1,000 US dollars (USD) and the card holder charges $300 USD during a monthly billing period, the holder still has access to 70% of
the available revolving line of
credit. If that balance is retired before the next billing date, there is no interest assessed. If not, then any partial payments made by the cardholder are applied along with applicable interest, adjusting the amount of the line of credit that the holder may use.
A business may also secure a revolving line of credit with a bank or other type of lender. The same general approach used with credit cards also applies to a bank line of credit. An applicant is granted a line of credit that is capped at a certain amount, and is subject to the applicant complying with all the terms and conditions found in the credit agreement. This includes making at least the specified minimum payment on the current amount borrowed on the credit line each month. As the balance increases, the amount of available credit decreases. As the business pays off more of the balance, the amount of available credit will move closer to the identified credit limit.
Assuming that the client is responsible with managing the revolving line of credit, the lender may offer to increase the credit limit, effectively expanding the credit line for the customer. In some cases, the lender may also lower the interest rate charged on any outstanding balance. This is sometimes the case when competitors are offering lower rates of interest. A lender may also decrease a line of credit, or increase the interest rate on that credit line if the client fails to manage the account in compliance with the provisions of the credit contract.