A revolving credit limit is a line of credit open to the limit agreed upon that you can borrow. This is common in two types of loans, those of credit cards and in certain home equity loans. Although you may have a maximum limit of credit available to you, this may be called a revolving credit limit or simply revolving credit, because paying back anything you borrow leaves you continual access to credit.

Most credit cards work on the principle of the revolving credit limit. You have a set limit of credit. As long as you make payments, or pay back whatever you owe, you continue to have access to the credit up to its limit.

This is a revolving credit limit because your access to borrowing money hinges on your paying back what you owe, thus credit limits will change. Say for example you have a credit card of the revolving credit limit type. You can borrow up to a maximum of 1000 US dollars (USD) on the card. You have spent 500 USD already. Your credit limit, the amount you can currently borrow provided you are making regular payments, is now 500 USD.

If you make a 250 USD payment on the 500 you owe, your credit available now changes to 750. If you pay off the total amount owed, you can again borrow up to 1000 dollars. On the other hand, if you don’t make payments, the bank may decrease your limit, declare you in default, and refuse to extend any more credit to you. You only have access to the revolving credit limit so long as you abide by the terms of your agreement with the lender.

Another form of revolving credit limit is based on the equity you have in your home. This is called a secure loan, rather than an unsecured one. When you borrow money, which with a revolving credit limit you can do regularly, the lender now owns part of the equity in your home until you repay the money. When people have a lot of equity in their homes they may occasionally use this form of revolving credit limit rather than using the unsecured loan provided by a credit card company.

Financial experts caution against using credit when you don’t absolutely need to. Homeowners who borrow on their equity through a revolving credit limit can find themselves with very little equity left in their homes when they overspend. This can create a financial crisis if you suddenly become unable to make your payments on the revolving credit limit or on your house. Especially when housing markets become unstable, you might end up owing more on your home than it is actually worth if you take too much equity from your home.

If you do plan on using a revolving credit limit that is supplied by equity in your home, it’s a good idea to set your maximum spending limit fairly low. Also resist offers from banks to increase that limit. Certainly there are times when you might need to borrow on the equity of your home, but this may be more cheaply accomplished through refinancing your home, where you lower your home interest rates, than it might be if you have a standing revolving credit limit loan with a bank. A revolving credit limit often poses a great temptation to overspend.