What is Revolving Debt and How to Manage it?

What is Revolving Debt and How to Manage it?

Written by Caitlin Wood
Last Updated January 18, 2021

While the word debt is used as an all-encompassing term to describe the process of owing a specific amount of money, there are in fact different types of debt all of which need to be dealt with and managed differently. Revolving debt is a type of debt that does not have a fixed monthly payment in the way that a car loan or mortgage does. This can often lead to debt and repayment issues if not used responsibly.

Convenience and freedom are two of the most desirable qualities of revolving debt, but they are also two qualities that can lead to irresponsible spending and serious credit and debt problems down the line. Learning to manage your credit card debt and other revolving debts is one of the best things you can do for your daily budget and overall financial health.

What is Revolving Debt?

Revolving debt refers to the type of credit accounts that can be used, paid off and then used again; there is no need to continue to reapply. These types of accounts come with pre-determined credit limits, varying interest rates that depend on your credit provider and their payments are calculated based on the balance they’re carrying. The following are examples of revolving debt:

Credit CardHELOCPersonal Line of Credit
Type of CreditUnsecuredSecuredUnsecured or Secured
Average Interest Rate Range18% – 23.99%3.00% – 9.99%5.71% – 20.00%
Term1 month*10 year draw period**
20 year repayment period**
6 months – 5 years
Amount$500 – $10,000+Can borrow up to 75%-90% of your home equity$1,000 to $100,000+

*Unlike other credit products, a credit card does not have a set term. You’ll have access to your credit card funds so long as you pay your balance (or at the very least the minimum payment)  every billing cycle. For example, your billing cycle from Feb 26 to March 25 will have a payment due date around March 15 to March 19 ((21 to 25 days after the billing cycle). Failure to pay will not only negatively impact credit but can lead to your credit card being revoked. 

**A HELOC allows you to withdraw money up to a certain credit limit. During the draw period, which is usually about 10 years, you can make interest-only payments. However, after the draw period ends, you’ll need to start making payments towards the interest and the principal balance. The repayment term can stretch up to 20 years. 

Payments are Based on Your Balance

Revolving debt does not come with a fixed payment like a typical loan, so the more you spend the higher your payment will be. This can often make it hard to create and stick to a budget as you’ll never know exactly what your payment is until you receive your statement. This is especially true for those who are carrying large balances or those who irresponsibly use their credit.

A revolving debt payment is based on a formula that calculates a percentage of your balance; usually, your minimum monthly payment is about 2.5% of your total balance. While this may seem like a small amount, if you have large balances on several credit accounts you could be spending hundreds on debt repayment every month. 

Balance OwedMinimum Monthly Payment PercentageMinimum Payment
Personal Line of Credit$3,0002.5%$75
HELOC$5,0002.5%$125
Credit Card$1,0002.5%$25

Minimum Payments Lead to Interest Charges

We all know that borrowing money isn’t free and that carrying around a lot of debt is even more expensive, this is why if you’re trying to manage your revolving credit accounts your number one goal should be to make more than the minimum monthly payment.

Making only the minimum monthly payment will lead to serious interest charges which will only increase the total amount of debt you have. There are no penalties for paying off the full balance of a revolving credit account, so don’t be afraid to pay more than your monthly payment. In order to better manage your revolving debt it’s important that you work towards paying off your balance in full every payment cycle.

Check out these debt relief options.

High-Interest Rates Will Cost You

When dealing with revolving debt, interest rates are one of the biggest challenges. Interest rates are typically much higher for revolving debt as you’re borrowing money against an open credit account that has no collateral. The higher your interest rate is the more expensive it is to carry around a significant amount of revolving debt.

Furthermore, if you fall into the minimum payment trap then the majority of your payments will be going towards paying off interest and not the principal amount owed. This is why if you’re looking to start a debt repayment plan it’s almost always a good idea to start with revolving debt (or the debt that has the highest interest rate), as it’s costing you the most.

Finally, you need to be aware of the different interest rates that your credit accounts may have for different types of transactions. For example, the interest rate for purchases is more than likely different from the interest rate for cash advances and balance transfers.

The True Cost of Borrowing

How Revolving Debt Affects Your Credit

Revolving debt can be dangerous if not managed properly. In particular, it has a strong impact on two of the most significant factors of your credit: credit utilization and payment history. 

Payment History

Too many late payments will not only spike your interest rate, but it will do serious damage to your credit score. In general, your payment history accounts for 30% of your credit score. As such, any missed or late payments on your credit card, line of credit or HELOC will result in a negative impact on your credit score. If you can’t afford to pay off your credit account in full, it’s recommended that you at least pay the minimum balance. This will protect you from incurring any late penalties and from receiving a negative credit remark.  

Credit Utilization

Your credit utilization; the amount of available credit you have versus how much you’ve used, is the second biggest factor used in the calculation of your credit score. It’s recommended that you use no more than 30% of your available credit. A higher credit utilization ratio will negatively impact your credit score. If you’re looking to get your revolving debt under control then you should aim to only use around 10%.

Dealing With Serious Debt Issues?

If you’re currently dealing with serious debt issues and feel as though you need help getting back on track, you should consider one of the many debt management options available through Loans Canada.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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