Revolving Debt

Financial Dictionary -> Debt -> Revolving Debt

Revolving debt refers to a type of debt account with a financial institution that gives the borrower a preapproved line of credit or account balance that can be spent within that month, although there is no fixed principal amount, because it can vary each month. The amount spent must then be paid off before the next month or then interest is applied. The most common form of revolving credit is the credit card, which is linked to the same kind of account, but allows spending on the account to occur by card.

The revolving debt system and the use of credit cards are now widespread around the world, with some transactions requiring the use of a credit card before they can take place.

The process of using a credit card and revolving debt account is quite simple. A borrower will be approached by an institution or will go seeking out a credit card from their bank. Depending on financial history and credit rating, as well as monthly income the lender will calculate a line of credit, or credit limit; for example $2,000.

If Eric obtained a credit card on June 12th, he can spend up to $2,000 (the credit limit) that month until July 12th. If he spent $1,500 in June, he will have until August 12th to pay it off in full. This continues for the foreseeable future. However instead of paying off the full amount there is usually a minimum payment that can be made, and the debt revolves over until the next month, with interest applied. There are sometime usage and insurance fees with credit cards.

Revolving debt accounts are also often given to businesses by their suppliers, allowing them to purchase supplies on credit, giving them a month to make payments. They are generally stricter than banks when it comes to minimum payments.