Convenience and flexibility 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 and varying interest rates that depend on your credit provider. Moreover, their payments are calculated based on the balance they’re carrying.
Types Of Revolving Debt
Here are some of the most common examples of revolving credit in Canada:
Credit Card Debt
A credit card lets you borrow from a revolving credit limit, which you can use as needed and repay on a monthly basis, with the option of making minimum or partial payments. Keep in mind that every credit card has different interest rates, terms and conditions.
Additionally, while minimum and partial payments can save you from any late penalties, interest will be applied to your unpaid balances. Some credit cards also come with high-interest rates of around 19.99% – 22.99% APR. So, whenever possible, it’s a better idea to pay your credit card bills in full and on time to avoid taking on more revolving debt.
Personal Line Of Credit
Similar to a credit card, a line of credit gives you access to a revolving, pre-set credit limit, with the option of minimum or interest-only payments. Interest is applied to your unpaid balances here too. However, rates are usually variable, meaning they fluctuate with Canada’s market rates.
Although some financial institutions will offer you a special debit card, lenders may provide several ways to access the money from your line of credit, including:
- Automated Teller Machine (ATM)
- Telephone or online banking (to pay bills or transfer money to your bank account)
- Written cheque
HELOC
Once you have at least 20% equity in your home, your mortgage lender might offer you a Home Equity Line of Credit. Like a personal line of credit, a HELOC lets you borrow from a revolving monthly credit limit. Only in this case, the credit line is secured against your home, which acts as collateral for the lender if you end up defaulting on your debt.
Depending on where you apply, the HELOC may be a standalone product or combined with your mortgage (for a ‘readvanceable’ mortgage). Watch out, if you miss too many payments on your HELOC, your lender can foreclose on your home to recover the debt.
Types Of Revolving Debt Overview
| Credit Card | HELOC | Personal Line of Credit | |
| Type of Credit | Unsecured | Secured | Unsecured or Secured |
| Average Interest Rate Range | 18% – 23.99% | 3.00% – 9.99% | 5.71% – 20.00% |
| Term | 1 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+ |
**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.
Repaying Your Revolving Debt
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.
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 Owed | Minimum Monthly Payment Percentage | Minimum Payment | |
| Personal Line of Credit | $3,000 | 2.5% | $75 |
| HELOC | $5,000 | 2.5% | $125 |
| Credit Card | $1,000 | 2.5% | $25 |
Features Of Revolving Debts/Credits
When it comes to revolving debts, the rules vary from product to product. That said, here are the main features associated with most revolving debts/credits:
Withdrawing Money
As mentioned, your lender may offer multiple ways to draw money with your revolving debt product.
- Credit Card – With a credit card, you just charge purchases to it, then transfer the funds from your bank account when you make payments.
- Line Of Credit – With a line of credit, you might have several withdrawal options, such as writing a cheque for the payee or going to an ATM.
Making Payments
When you make a payment toward a revolving debt, you’ll see your balance decrease and your available credit increase. Most products only require one minimum payment a month, but paying more than that amount is recommended. That’s because your unpaid balance will carry over to the next billing cycle, where it will start accumulating interest.
Your interest rate can depend upon a number of factors, including your credit history, account type and transaction type. You should also be wary of these costs:
- Annual membership fees
- Origination fees
- Closing costs (mainly for HELOCs)
- Transaction fees (credit card cash advance, money transfer, etc.)
How Is A Revolving Loan Different From An Installment Loan?
Unlike revolving credit, an installment loan allows you to borrow a specific lump sum of cash. Rather than paying the lender back in monthly balances, your debt is divided into installments and repaid over a set term. After your debt is fully repaid, the lender will close your account and you won’t have any more access to credit until you apply again.
Even though both of these products can have an effect on your credit score, here are some other noticeable differences between revolving debts and installment loans:
- Borrowing Limit – An installment loan lets you borrow a specific amount of liquid money, one-time. On the other hand, a revolving debt gives you access to a predetermined credit limit, which you can borrow from and replenish indefinitely.
- Versatility – Since revolving credit products can have high rates, they’re often a better choice for daily (recurring) expenses, like groceries. Installment loans can be more ideal for larger, singular costs, such as large home and auto repairs.
- Interest Rates – Some revolving debts (especially credit cards) have far higher purchase and transaction rates than the average installment loan does. However, installment rates may be higher if you have bad credit or finances when applying.
- Payments – Revolving debts are paid off monthly, with the option of minimum or partial payments, and interest applied to all unpaid balances. Installment loans are paid in segments and the total interest is divided across the debt amount.
How To Handle Revolving Debt?
Despite the benefits of revolving credit products, they’re still a kind of debt, which means you have to act responsibly with them. Here are some tips for doing that:
- Pay More Than The Minimum – While minimum payments can protect you from late fees, your unpaid balances will generate interest. Paying anywhere over the monthly minimum reduces that interest, but making full payments is always best.
- Control Spending – Revolving credit can be perfect for smaller costs, but if you don’t monitor your expenses, check your balance regularly and make full monthly payments, the higher interest rates can significantly raise your total debt amount.
- Plan Ahead – Before you apply for any revolving debt, compare your options and budget properly. For example, a credit card or personal line of credit is good for daily costs, but a HELOC may be better for ongoing expenses, like renovations.
- Watch Out For High Interest – 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.
Can Revolving Debt Affect Your Credit?
Revolving debt can be dangerous if not managed properly. In particular, it can have an impact on your credit utilization and payment history.
Payment History
Too many late payments will not only spike your interest rate, but it may also negatively impact your credit. In general, your payment history accounts for around 30% of your credit score calculation. As such, any missed or late payments on your credit card, line of credit or HELOC can result in a negative impact on your credit scores.
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 credit you’ve used versus how much credit you have, is another common 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 may negatively impact your credit scores. If you’re looking to get your revolving debt under control then you should aim to only use around 10%.
Additional Reading
Revolving Debt
When is it good to have revolving credit?
What are installment loans?
What’s wrong with making minimum payments?
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.
