Revolving vs. non-revolving credit: What's the difference?

There are significant differences between revolving and non-revolving credit – and it’s a financial consumer’s job to know them. (iStock)

Americans may not realize it, but there are two types of consumer credit – revolving and non-revolving.

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Getting to know the difference between revolving credit and non-revolving should be job one for anyone looking for financial assistance, be it a credit card or a mortgage. There are big differences between the two.

Let’s take a deep dive into both options and see how each may impact your finances.

Revolving Credit

Strictly defined, revolving credit is a line of credit with two unique distinctions.

“Revolving credit is a credit model whose required monthly payment may vary based on the account's balance,” said Todd Christensen, a community financial educator with MoneyFit.org, in Boise, Id. Revolving credit has no defined repayment (also known as amortization) schedule. “If the balance can go up or down from month to month depending upon usage, it is a revolving account,” Christensen added.

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Good examples of revolving credit include credit cards, home equity lines of credit, personal lines of credit, and business lines of credit. “The key benefits of revolving credit include the ability to pay all or just a portion of the credit balance,” Christensen says. “That offers the flexibility for consumers with cash flow restrictions.”

Non-revolving credit

This is a line of credit or a loan with a set monthly payment and a set pay-off date.

“If the repayment agreement means the balance will go down each month until it is repaid in full, it is a non-revolving account,” Christensen said. Examples of non-revolving credit include home mortgage loans, car loans, student loans, personal loans, home equity loans, and business loans. “Psychologically, it is easier to repay non-revolving debts because the payment is usually the exact same every month until the debt is repaid,” Christensen said.

Due to the set monthly payment, there is less flexibility in payment options than with revolving credit accounts. “If you’re late or miss a payment, your loan might be considered in default, leading to penalty fees and negative credit report activity,” he added.

Differences between revolving and non-revolving credit

The key difference between revolving and non-revolving lines of credit is what occurs with the funds available after the first payment is made, said David Bakke, a money specialist at the financial website DollarSanity.com.

“A great example of a revolving line of credit is a credit card,” Bakke said. “Let's say you open a credit card with a limit of $5000, and you spend $500 in the first month. After that first payment is made, not much happens to your available funds. In fact, your account continues to rise or fall depending on your  purchases and payments.”

Compare that to an auto loan, which is a good example of a non-revolving line of credit.

“Let’s say you purchase a car using a loan for $10,000,” Bakke said. “After the first payment is made, your funds go down, and will only go down as you continue to pay the loan off. At that point, the auto loan account is closed.”

Impact on credit

By and large, there isn’t a great deal of difference impact-wise, between revolving credit and non-revolving credit on a consumer’s credit score.

“The FICO credit scoring model does offer some advantage to consumers who use a variety of types of credit, so it may help more to have two credit cards and a personal loan than to have three credit cards,” said Michael Sullivan, a personal financial consultant with Take Charge America, a nonprofit credit counseling agency based in Phoenix, Az.

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Ideally, revolving credit cards would be used only for convenience and consumers would not carry a balance, which would help boost a credit score, Sullivan noted.

“Consumers who get in trouble with credit card balances might consider a non-revolving loan to pay off the balances and enjoy a lower interest rate,” he said. “Consumers considering loans for homes, college, autos or almost any substantial expense should use non-revolving credit just for the savings.”

“Consequently, the real difference is that revolving credit cards mostly carry interest rates from 15-percent to 30-percent while non-revolving credit agreements are often half as costly,” Sullivan added.

“Convenience comes at a price,” he said.