Revolving credit falls under the category of consumer credits. It is also known as “permanent credit” or in English as “revolving credit”.
The principle is simple. A credit institution provides a borrower with a sum of money which he has at any time to finance any current expenditure.
Upstream, a contract is concluded and signed between the lender and the borrower, to define the maximum amount available, the amount of monthly repayments and the borrowing rate (APR).
This type of credit theoretically has a duration limited to one year. But as long as the relationship between the lender and the borrower is healthy and there are no arrears, this contract is renewed by tacit agreement. The general conditions of use may change and in this case they are notified in writing.
If the reserve of money constituted by this type of credit is not used for two years, then the credit must be closed.
When to make a revolving credit?
Revolving credit is especially useful for people who have little or no cash and / or savings, and who do not wish to use it for their current or exceptional expenses.
It then represents an immediate reserve which can be used in case of unexpected expenditure, without being overdrawn and without the need to contact a bank.
The fact of having concluded this type of contract thus allows to have a serenity. The borrower can face any type of situation, whether for emergency situations such as to deal with a refused payment in a store, or to finance a short-term project for a weekend getaway.
What are the conditions for obtaining revolving credit?
The bank that offers this type of credit takes a significant risk because it offers credit by knowing the personal and financial situation of its client at the time of the conclusion of the contract, but it does not know how it will evolve. In case of deterioration of his situation, the customer, as long as he reimburses, can always use this reserve.
This is why banks offer maximum amounts of credit usage to customers they know well, and lower amounts to customers they know less.
In all cases, you must prove regular income and current expenses in line with this income to obtain it.
What is the cost of a revolving credit?
The cost is always proportional to the risk, the cost of this type of credit is very high. Therefore, it is recommended to use it only for exceptional and unforeseen expenses. Otherwise, it will always be preferable to take an unrestricted consumer credit, or even better an affected consumer credit if this is possible.
How to use revolving credit?
Once the contract is concluded, it can be used in two ways completely independently.
Simple use of a line of credit
The borrower has in his account list an account stamped with the name of the product in the bank and a zero amount opposite.
When the borrower will need to spend $ 500 and he will not have them, he will make a transfer from this account to his current account. He will then see a negative balance of -500 dollars on his “revolving credit” account and a positive balance of 500 dollars on his personal account. He will be able to use this sum of money in a completely conventional manner.
At the end of the following month (according to the terms of the contract), a reimbursement of part of the borrowed amount will be made automatically. This reimbursement will be made by direct debit from the current account of (-200 dollars for example) and payment from the revolving credit account (+ 200 dollars for example). If we take the terms taken in the example, the balance will then be -300 dollars on the revolving credit account.
Use with a credit card
The principle is the same as before, except that the money reserve is used using a credit card.
As long as your card account is in credit (positive balance), the borrower uses it like a conventional card (debit card or deferred debit), and only card-related fees are charged.
However, if the card is debit (negative balance), the borrower automatically uses his reserve. In general, if he reimburses the reserve used within the month, he will not pay interest. On the other hand, if he uses part of it and does not reimburse it within the month, he will pay interest on this part.