What Is A Revolving Balance?
A revolving balance is the portion of credit card spending that goes unpaid at the end of a billing cycle, and it is carried over from one month to the other month.
It is not usually a constant rate; it depends totally on the withdrawn and repaid amounts.
If a balance is revolved, then the financial institution charges interest on the amount.
The interest is a levy charged to users for borrowing the lender’s funds and is determined by the size of the balance and the interest rate of the agreement.
The line of credit can used and reused as long as repayments keep coming in as at when due.
Complete payment of the loan absolves the user of the debt.
As seen in credit cards, the principle of revolving credit allows customers to make purchases to a specific limit and pay the debt every month.
Provided the spending cap is not exceeded, the user can still make purchases regardless of whether he pays off his debt balance or not.
If he fails to clear the debts, the balance carried over to the coming month(s) is the revolving balance.
There is much wisdom in clearing revolving balances as they accrue huge interest every month, leading several credit card users to have no choice but to remove their statement balances or keep them to a minimum.
They are also a pointer to the level of reliance of a user on credit. For instance, a high revolving balance indicates that a borrower is over-dependent on credit which is not advisable because it negatively reflects their credit score.
Revolving Balance Example
If a specific individual, say A, who goes to a financial institution to obtain a credit facility with a $5,000 credit limit and an accruing interest rate of 12% then goes ahead to purchase $500, they are required to pay interest on the balance until the debt is cleared totally.
If the said individual decides to carry a revolving balance with a minimum payment of $50 per month, the period for repayment of the debt and a cleared balance is about 11 months, assuming strict compliance.« Back to Glossary Index