A revolving credit limit is a line of credit open to the limit agreed upon that you can borrow. This is common in two types of loans, those of credit cards and in certain home equity loans. Although you may have a maximum limit of credit available to you, this may be called "revolving" because paying back anything you borrow leaves you continual access to credit.
Most credit cards work on the principle of the revolving credit limit. You have a set limit of credit. As long as you make payments, or pay back whatever you owe, you continue to have access to the credit up to its limit.
This limit is revolving because your access to borrowing money hinges on your paying back what you owe, thus credit limits will change. Say for example you have a credit card of this type. You can borrow up to a maximum of $1,000 US dollars (USD) on the card. You have spent $500 USD already. Your credit limit, the amount you can currently borrow provided you are making regular payments, is now $500 USD.
If you make a $250 USD payment on the $500 USD you owe, your credit available now changes to $750 USD. If you pay off the total amount owed, you can again borrow up to $1,000 USD. On the other hand, if you don’t make payments, the bank may decrease your limit, declare you in default, and refuse to extend any more credit to you. You only have access to the credit so long as you abide by the terms of your agreement with the lender.
Another form of revolving credit limit is based on the equity you have in your home. This is called a secure loan, rather than an unsecured one. When you borrow money, the lender now owns part of the equity in your home until you repay it. When people have a lot of equity in their homes, they may occasionally use this form of credit rather than using the unsecured loan provided by a credit card company.
Financial experts caution against using credit when you don’t absolutely need to. Homeowners who borrow on their equity can find themselves with very little equity left in their homes when they overspend. This can create a financial crisis if you suddenly become unable to make your payments on the revolving credit limit or on your house. Especially when housing markets become unstable, you might end up owing more on your home than it is actually worth if you take too much equity from your home.
If you do plan on using a revolving credit limit that is supplied by equity in your home, it’s a good idea to set your maximum spending limit fairly low. Also resist offers from banks to increase that limit. Certainly there are times when you might need to borrow on the equity of your home, but this may be more cheaply accomplished through refinancing your home, where you lower your home interest rates, than it might be if you have a standing revolving loan with a bank. Revolving credit often poses a great temptation to overspend.
