Revolving credit
Banks can offer you credit in different ways. One of these is revolving credit, also known as open-end credit. Here's what it is, when it might be suitable, and which risks to watch out for.
What is revolving credit?
Revolving credit is a very flexible form of borrowing. You can use the amount made available to you by the bank or other lender (the credit limit) either all at once or in smaller amounts, spread out over time. You repay what you borrow in monthly instalments. What makes it “revolving” is this: every time you repay part of the loan, the amount you repaid (capital only, not interest) becomes available again for you to use. In other words, the credit rotates.
Revolving credit is often linked to a credit card, known in this case as a revolving card. You may be offered the option to pay off your monthly credit card spending either in full and interest-free (this is called charge mode, where the balance is paid in one go the following month), or through monthly repayments with interest (revolving option).
You can either agree on a fixed monthly repayment with the bank - which can usually be changed at any time - or follow a pre-set repayment plan.
Costs of revolving credit
o understand whether a revolving credit offer is good value, and to compare it with others, check the APR (Annual Percentage Rate). This rate shows the total yearly cost of the credit as a percentage of the amount borrowed, including interest, fees and charges.
You'll find the APR and other cost details in two free documents that the bank must give you before you sign the contract: the Information Sheet, and the SECCI form (Standard European Consumer Credit Information).
The SECCI form has a standard layout, which makes it easy to compare offers from different lenders. It also includes key information about the lender, main features of the loan (amount, repayments), your right to withdraw from the contract or to repay early, and special rules that apply if the offer is made online or by phone. If anything is unclear, remember you have the right to free help and explanations from the bank, and you should only sign once you fully understand all the terms.
Risks
Like any form of borrowing, revolving credit carries the risk of building up debt beyond your ability to repay. In fact, banks often apply higher interest rates to this type of credit than to standard loans. Ask yourself if you really need this form of credit, and check whether there are more affordable alternatives.
Also consider the length of the repayment period. Choosing lower monthly instalments may seem more manageable, but it means the loan will last longer and you'll end up paying more in interest overall.
If you use revolving credit frequently, interest costs can quickly add up and become expensive.
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