A credit report is a list of most, if not all, of a person's history regarding their financial accounts involving credit. This credit can come in a wide variety of types, including mortgages, car loans, credit cards and even simple short-term loans. The information is used by lenders to determine how they want to handle an application for credit. Here's a brief explanation of the term "revolving" that is often found on credit reports.
Significance
There are many types of credit available in today's financial world. For some lenders, certain kinds of credit accounts are more important than others. In order to distinguish between various types of credit, the term "revolving" appears on accounts in which the credit extended to the borrower is not tied to a specific repayment period.
Types
There are several types of revolving credit loans. The most common are credit card accounts which extend a loan to a customer with each charge up to the credit limit. Other kinds of revolving credit include home equity lines of credit or HELOCs (though not home equity loans), store credit and certain kinds of business lines.
Benefits
Revolving credit allows a borrower to get access to funds when needed and then pay them off when desired without having to reapply for credit again in order to re-borrow funds again at a later date.
Considerations
The highest credit scores require a history that includes a blend of multiple types of credit including revolving credit accounts. A person with only credit card accounts would have a lower score than someone whose credit history includes non-revolving accounts such as car loans or mortgages.
Misconceptions
Revolving accounts are one of the most misunderstood accounts when it comes to their affect on a credit score. Many people pay off their credit cards each month and therefore assume that their credit score reflects a zero balance. However, credit history is often reported on a specific day and if the account has a balance on that day, that balance will be reported, regardless of if it is paid off in the next day or two. Thus, paying off a card each month seldom results in a zero balance being reported.
Prevention/Solution
It is important to monitor your credit report regularly. Revolving accounts are most frequently targeted for fraud. Get your free credit report each year and make sure there is nothing unusual in it.
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