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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.
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.
Here are some of the most common examples of revolving credit in Canada:
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.
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:
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.
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+ |
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 |
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:
As mentioned, your lender may offer multiple ways to draw money with your revolving debt product.
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:
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:
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:
Revolving debt can be dangerous if not managed properly. In particular, it can have an impact on your credit utilization and 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.
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%.
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.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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