5 Surprising Ways Revolving Debt Helps You

Debt can be good or bad, depending on how you use it. Different types of debt serve different purposes. We use installment loans like mortgages, car loans, and student loans to purchase homes, cars, and to get an education — but these aren't the only types of debt.

There's also revolving debt, such as a credit card or a home equity line of credit. This type of debt can be more dangerous because it lacks a fixed payment amount, and minimum payments are based on how much you utilize the line of credit. Despite the unpredictable nature of revolving debt, however, it can be surprisingly helpful. Here's how:

1. It's Available When You Need It

Life is unpredictable. Even when you're financially responsible with money, an emergency can pull the rug out from under you. Sometimes, there isn't enough cash in your account to handle the unexpected. Or maybe you have cash, but don't want to drain your savings. Revolving debt lets you pay off purchases over time, so that you can keep more cash in your wallet.

Revolving debt is also convenient because you have immediate access to funds when you need it. This is different from an installment loan. You can apply for a loan when you need money for an unexpected expense, but it's not immediate. You have to submit an application and wait for an approval, which can take days. Plus, there's no guarantee the bank will approve the amount you need.

2. It Helps Build Creditworthiness

Whether you're looking to establish your credit history or rebuild your credit after a blunder, you have to use credit to improve your FICO score. Revolving debt can help in this regard.

Several factors make up your credit score, including the types of credit accounts in your name. Some people only have one type of credit account, perhaps an installment loan like a mortgage or car loan. Making timely payments on these accounts help their credit scores, but they need other types of account to increase credibility and creditworthiness.

Credit mix makes up approximately 10% of your credit score, so it's worth adding a revolving account if you don't already have one. What's surprising is that revolving debt can be a good thing on your credit report. If you have a revolving account and you manage this account well, other creditors and lenders will take notice. This builds their trust in you, which makes it easier for you to qualify for other types of accounts in the future.

For revolving debt to be helpful, however, you have to pay your bills on time, and you shouldn't utilize too much of your available credit. Payment history makes up 35% of your credit score, and the amount you owe makes up 30% of your credit score.

3. It Protects Your Credit Score

If you're self-employed or an employee who gets paid once a month, a revolving account can keep your head above water until you receive a paycheck. Ideally, you should have a savings account for situations like this, but if you're in the process of growing your emergency cushion, using a credit card to tide you over and acquiring short-term revolving debt is the lesser of two evils. In this case, revolving debt can protect your credit — and you'll avoid late fees.

If your creditors don't receive a payment after 30 days, they'll report the lateness to the credit bureaus. A single late payment can reduce your credit score by 50 to 100 points, depending on the type of account. Using a credit card and increasing your revolving debt can cause a slight decrease in your credit score, but your credit score will rebound as soon as you pay down the balance. On the other hand, a late payment can stay on your credit report for up to seven years, and it takes years to regain lost points.

4. You Have Flexibility of Use

Revolving debt is also helpful because there's flexibility of use. When you apply for an installment loan, you have to use funds for a specific purpose. For example, a mortgage loan can only be used to buy a house, and a student loan can only be used for educational purposes. Revolving debt can be used for any purpose, such as renovating your home, paying tuition, taking a vacation, etc.

5. You May Experience a Lower Interest Rate

The interest rate on your revolving debt could be lower than the interest rate on personal loans offered by banks, but only if you have good credit. If so, you'll pay less in interest charges over the life of the debt, and you can enjoy lower minimum payments.

Make sure you shop around and compare rates. Some credit cards offer 0% interest on balance transfers and purchases for the first six to 18 months, and then a low permanent APR after the introductory rate period.

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5 Surprising Ways Revolving Debt Helps You

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