Revolving Credit
Revolving credit is a type of loan arrangement where the borrower can borrow and repay funds at any time within a pre-approved credit limit. The borrower only pays interest on the amount used and can borrow again after repaying part or all of the loan. It is commonly used for credit cards and business loans.
Definition: Revolving credit is a loan arrangement where the borrower can borrow and repay funds at any time within a pre-approved credit limit. The borrower only pays interest on the amount used and can borrow again after repaying part or all of the loan. It is commonly used for credit cards and business loans.
Origin: The concept of revolving credit dates back to the early 20th century when banks began offering flexible credit limits to meet customers' short-term funding needs. With the widespread adoption of credit cards, revolving credit became widely used in the mid to late 20th century.
Categories and Characteristics: Revolving credit mainly falls into two categories: personal revolving credit and business revolving credit.
- Personal Revolving Credit: The most common form is credit cards. It is highly flexible and suitable for daily expenses and short-term cash flow management.
- Business Revolving Credit: Typically used for operational funding needs of businesses, characterized by larger credit limits and relatively lower interest rates.
- Flexibility: Borrowers can borrow and repay funds at any time.
- Interest Calculation: Interest is only charged on the amount used.
- Credit Limit: There is a pre-approved maximum limit.
Case Studies:
- Case 1: Mr. Wang is a freelancer who applies for a credit card for daily expenses. Each month, he uses the credit card to pay for various costs as needed and repays part or all of the debt before the due date. This way, he can manage his cash flow flexibly.
- Case 2: A small business needs to purchase a batch of raw materials but lacks sufficient cash flow. The business owner applies for a business revolving credit to pay for the purchase. A few months later, the business generates revenue from product sales and uses this income to repay part of the loan. This way, the business can use the credit again when needed.
Common Questions:
- Question 1: Is the interest rate on revolving credit fixed?
Answer: The interest rate on revolving credit can be either fixed or variable, depending on the loan agreement. - Question 2: What happens if I fail to make timely repayments?
Answer: Failing to make timely repayments can result in a lower credit score, late fees, and higher interest rates.
