Revolving Credit vs. Non-Revolving Credit: What Are the Pros and Cons of Each?

Nicolas Cesare  | 

What kind of lifestyle do you want? How long are you willing to wait to get there? There are countless lenders willing to help you get the things you want sooner, but this convenience will come at a price. This is a major reason why 14% of Americans have over $100,000 in debt. When it comes to understanding the terms of your credit accounts — particularly regarding revolving and non-revolving credit — you should strive to learn more in order to best use them.

Effective and responsible financial management can involve the use of both revolving and non-revolving credit, but it’s vital to understand the differences between the two. Failing to understand the terms of your credit can lead to difficulties managing your debt, leading to a spiraling loss of control and, ultimately, bankruptcy.

To help you avoid such an outcome, this guide will provide an overview of the pros and cons of revolving and non-revolving credit. By understanding these differences, you’ll be well on your way to making responsible borrowing decisions and improving your financial management skills.

What Is Revolving Credit?

Revolving credit is credit that you can borrow and repay in a renewing cycle. These are usually month long cycles in which you can choose to pay the amount owed in full or carry a balance into the next cycle, revolving the credit. Examples of revolving debt include:

Revolving credit is important because it gives you flexibility when it comes to how you manage your finances. If you are given a line of credit up to a certain amount for a given month, then you can use any portion of that credit line that you desire. Once the month is over, you can pay your balance in full or meet a minimum required payment determined by your lender. After that, the next cycle begins and your line of credit is renewed, either in full or minus your outstanding balance at the end of your last cycle, plus interest and any other applicable fees (depending on the terms of the account).

Pros and Cons of Revolving Credit

There are a number of benefits and drawbacks to revolving credit. Best practices for such accounts allow you to leverage their advantages while mitigating any risks they present.

Pros

Cons

  • It can be easy to overspend;
  • Higher interest rates than non-revolving credit;
  • Payments can vary depending on your balance, which can make budgeting for payments more difficult than a predetermined installment loan.

Best Practices for Revolving Credit Use

Understanding how revolving credit works is important for making sure that you are in the best financial health possible. Save non-revolving credit for big purchases when you only need a one-time lump sum, but use revolving credit for smaller items in order to establish a good credit history and improve your credit score.

Ideally, you should keep your revolving credit counts as low as possible to limit interest payments. Let’s say you open an account with your credit card company and they give you a line of credit of $1,000. You can spend any amount of that credit limit you desire, so let’s assume that you spend $200. You want to avoid credit card debt, so you pay the full $200 balance by the end of the month. When the next month comes, you’ve got the whole $1,000 again to spend (or not spend) as you wish — typically with no interest.

Unlike non-revolving credit, revolving credit accounts can be left open when they aren’t seeing use. Although it may be tempting to close accounts that you’re not using in order to avoid annual fees, this is actually a major mistake that many cardholders make. Instead of closing accounts unnecessarily, try hanging on to older credit card accounts, even when they are not in use.

Having an older credit card account will help to establish a strong credit history for you. Ultimately, having a good and extensive credit history will help you when it comes to negotiating with your credit card company. It can also help when you need to use non-revolving credit, like getting a mortgage for a new home.

Revolving credit is a great way to improve your credit score. Thanks to its consistent nature, revolving credit gives you the opportunity to show month over month that you are capable of handling debt responsibly and making payments on time. If you play your cards right and keep up good credit card habits on this account, then you will probably be in a position to negotiate for a higher credit limit in the future.

What Is Non-Revolving Credit?

Non-revolving credit, also called installment credit, is a term for any form of credit that is not renewed on a set cycle. In other words, non-revolving credit is any type of one-time loan that you receive, then make regular payments on — typically with interest and other potential fees. Some examples of non-revolving credit are:

What’s important to remember about non-revolving credit is that you have a lot less flexibility with the loans that you receive. If you take out a $10,000 loan to buy a new car, then you are responsible for repaying all $10,000. Additionally, you cannot count on getting another $10,000 the next time that you need a new car. Non-revolving credit is a one-time arrangement between a lender and a borrower, so you have to make the most of it.

Pros and Cons of Non-Revolving Credit

As with revolving credit, there are pros and cons to consider when employing non-revolving credit. Understanding these will help you use them most effectively.

Pros

  • Enable you to make major life purchases sooner;
  • Predictable payment amounts, making it easy to factor into your budget;
  • Lower interest rates than revolving credit.

Cons

  • An inflexible source of funding — you only receive a lump sum when you take out the loan;
  • Generally lead to a long-term commitment of installment payments;
  • The terms of non-revolving debts are generally non-negotiable.

Best Practices for Non-Revolving Credit Use

Non-revolving credit is often best for large purchases. This is because, unlike revolving credit, non-revolving lenders don’t have to worry about meeting their lending obligations month over month. Instead, they just need to lend you one large sum of money. They can then earn money on the transaction through interest rates and any additional fees.

Speaking of which, non-revolving credit generally carries lower interest rates than revolving credit, although that isn’t an absolute rule. Mortgages have been known to carry APRs in the single digits (compared to credit cards, which often charge 15 to 30% interest). This makes non-revolving loans preferable, when applicable to your situation.

When borrowing, it’s important to not borrow beyond your means. You must ensure that the obligation of installment payments doesn’t place an excessive burden on your budget. Before making a major purchase with non-revolving debt, it’s vital that you determine the amount of debt that you’re comfortable with paying off each month. If this cushion doesn’t allow you to make key milestone purchases in life, carefully assess where you may be able to save some money.


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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.