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Revolving debt usually refers to credit card debt. This is debt that changes from month to month as people make purchases and make payments. It is therefore differentiated from the type of debt people have when they borrow a defined amount of money at a given time like for a personal loan or to buy a car or a house. The debt from these types of loans gradually decreases, and it is not possible to increase the debt without getting a new loan.
With things like credit card debt, people can choose to owe as much or as little as they want, up to the limit of the credit card. There generally is an upper limit amount on what people can owe, and limits are often determined by credit rating. Those with excellent credit may be able to get high limit cards, but this doesn’t mean that the revolving debt amount has to be high. Instead, if people pay off all they owe on a card each month, the amount of debt is small, and can contribute to a good credit rating.
Another thing that can change with revolving debt is monthly payment owed. Most credit card companies set limits of a certain percentage of the debt that must be paid each month. If there is no debt then no payment may be due. Otherwise, credit cards may require minimum payments of several percentage points of the debt or they may only require payment to cover the interest rate charged. Borrowers can pay more of the debt each month based on choice, availability of funds and preference.
When revolving debt remains from month to month, the debt amount carries over or revolves to the next month, and interest is charged on any debt that remains unpaid. In addition, amount of available credit goes up or down depending on the debt, so the term revolving credit is often intricately connected to revolving debt. As debt gets paid down, more credit is available, but as debt increases, less total amount can be borrowed.
It used to be that consumers in good credit standing could count on their revolving debt to not greatly influence their ability to borrow more money up to their credit limit. This has changed somewhat in the late 2000s. Some companies have closed the accounts of those with revolving credit lines or significantly raised interest on new purchases. A few companies have also reduced line of credit when accounts aren’t used frequently or if borrowers miss a payment or turn in a late payment. These extra measures may change the way that revolving debt and credit are viewed in the future, and it may no longer be possible to count on initial credit lines offered by a company remaining the same.
Subway11 - I agree with you most that people don’t consider the risk that they are putting themselves in by taking this type of loan to pay off credit cards.
I do like Dave Ramsey’s approach of paying off the smallest balances first and the tackling the others. It does make you feel like you are making progress which makes you want to continue.
His book, “The Total Money Makeover” talks about personal finance and how to eliminate debt of all kinds.
He says that it would be okay to take out a personal loan to pay off credit cards. You can take out a loan from a credit union and do this.
Since credit unions are
nonprofits they usually offer great terms. Sometimes they will even give you a discount on the loan if you sign up for direct deposit.
I try not to use my credit cards and when I do I make sure that I pay them off at the end of the month because if not the balances continue and then it feels like you are climbing a mountain and it become overwhelming.
Comfyshoes - I know that some people use home equity loans and lines of credit in order to pay off their credit card debt.
People say that the interest rate on a home equity line or loan is substantially lower than that of a credit card so they will save money.
The problem with using loans to pay off credit cards especially when it involves your house is that a home equity loan or line is a recourse loan in which the bank can take your home if you default.
This is why the interest rates associated with these loans are low because there is not much risk for the bank.
In addition, a lot of people
that do this begin to charge up their credit cards again. Now they not only have a home equity loan but they also have credit card debt again. This puts them in a worse situation and they put their home at risk as well.
Moldova - People usually spend more when they use their credit cards because they are not immediately accountable for the purchase.
This is why department stores want to give you all of these discounts so that you will use your credit card to charge your purchases.
Since they know that most people do not pay off the balance they stand to make an additional 20% to 25% in interest.
Dave Ramsey the financial guru really hates credit cards and advises his listeners to pay off their smallest credit card balances first and then continue until all consumer debt is eliminated.
He calls this the debt snowball because people start to gain momentum as they see credit card bill being eliminated.
It is best to limit the amount of credit cards you have so that you won’t spend so much. This is really the best credit card debt advice that I have.
I know that dealing with credit card debt is stressful. They say that the average American family owes about $12,000 in credit card debt.
It is really important to pay your credit cards as quickly as possible because if you only pay the minimum payment you will have that debt forever.
Also you get a false sense of security thinking that the minimum payment is not too bad and then continue to charge up more on your card.
I try to pay off my credit card bills at the end of the month so that I don’t have to worry about finance charges. In addition, I take advantage of the rewards programs that my credit card company offers so I also get that little bonus as well.
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