Building Credit: What is Revolving Credit?

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Credit card accounts are classified as “revolving” accounts because they allow consumers to either pay their balance in full or make a minimum payment and “revolve” a balance to the next month. How consumers manage this process is one of the best indicators of their creditworthiness. It shows how they handle their debt loads and whether they make payments on time. But does a lack of revolving accounts affect your credit score?

Factors That May Influence Credit Scores

The biggest factor used to calculate credit scores is payment history, followed by credit utilization. Creditors want to see a long record of on-time payments. They also want to see how much credit consumers are using at a given time. Are they maxing out their cards and taking a long time to pay down their balances, or are they taking on debts they can easily pay at the end of each month? Payment history and credit utilization make up about two-thirds of your credit score.

Having At Least One Revolving Account Can Help Credit Scores

If you’ve recently checked your credit score and it indicates that not having a credit card is hindering you, opening a new credit card account should help. Having a credit card is important because you decide how much to charge and how much to repay each month. This independent decision-making gives lenders additional insight into a consumer's debt management and payment habits. Therefore, demonstrating that you can manage credit card debt over time is often a good way to improve your scores. You don't have to carry a balance or pay finance charges. Just using your cards and not letting your balances get too high compared to your limits will demonstrate that you can manage your credit obligations well.

How Opening a New Credit Card Account Could Impact Credit Scores

You might not see an immediate increase in your credit scores. In fact, you might see scores dip a bit when you first open the account. A new, unused card represents risk. It's not yet clear whether you will charge to your limit or use the card carefully and pay your balances as agreed.

But with time and wise use, your scores should bounce back then surpass your previous scores. The longer your credit card account remains open and in good standing, the more it will boost your credit scores.

Responsible credit card use can help you raise your credit score without having to take on extra debt. The key is using your cards wisely, so they don’t hurt your credit. If you have any questions or concerns about your credit profile or the wise use of credit cards, Robins Financial can help. Give us a call, or stop by and speak with one of our member service representatives today. We can answer your questions and offer advice on how best to make your credit cards work for you. We can also help you find the right credit cards and other lending products to meet your unique needs.

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