While revolving credit provides borrowers with flexibility, too much revolving debt can be crippling. Even with falling interest rates, the most vulnerable credit card holders can use some help.
Let’s look at ways of dealing with mounting revolving debt. But first, here’s a primer on what revolving debt is and how it differs from installment debt.
Key Points
• Revolving credit allows borrowing up to a limit but can lead to high interest and debt if not managed well.
• Installment debt involves fixed monthly payments until the loan is paid off, offering predictable payments and potential refinancing options.
• Managing revolving debt involves strategies like budgeting, debt consolidation, and balance transfers to lower interest rates and monthly payments.
• Credit utilization ratio and payment history significantly impact credit scores, with late payments damaging scores for up to seven years.
• Debt settlement and credit counseling are options for managing debt, but they come with potential drawbacks like damaged credit scores and high costs.
A Closer Look at Revolving Debt
There are two main categories of debt: revolving and installment. Revolving credit lets you borrow money up to an approved limit, pay it back, and borrow again as needed. The two most common revolving accounts are credit cards and a home equity line of credit (HELOC).
HELOCs are offered to qualified homeowners who have sufficient equity in their homes. Most have a draw period of 10 years, followed by a repayment period. A less common type of revolving credit is a personal line of credit, usually obtained by an existing customer of a lending institution.
Then there are credit cards, which became part of the American fabric in the 1950s, starting with the cardboard Diners Club card. You can choose to make credit card minimum payments, pay off the entire balance each month, or pay some amount in between. If you don’t pay off the full balance when it’s due, your balance will accrue interest.
That’s one of the quiet dangers of revolving debt: If you haven’t reached your limit, you can continue to borrow while you owe money, which adds to your debt and to the amount of interest accruing on it.
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Revolving Debt vs. Installment Debt
Now let’s take a look at installment debt. It differs from revolving debt in a few key ways — namely, how you borrow money, how you pay it back, and how interest is calculated.
Installment credit comes in the form of a loan that you pay back in installments every month until the loan is paid off. Think mortgages, auto loans, personal loans, and student loans.
Installment loans can be secured with collateral, or they can be unsecured. Some loans could have fees, and the interest rate may fluctuate, depending on whether you have a fixed or variable rate loan. The loan amount is determined when you’re approved.
There are benefits and drawbacks to both types of debt. Let’s take a look.
Revolving Debt Pros and Cons
Pros:
• Borrow only what you need
• Can access credit quickly
• May qualify for high borrowing limit
Cons:
• Will have a credit limit
• Can have high interest rates
• Can be easy to run up a big balance
Installment Debt Pros and Cons
Pros:
• Can cover large or small expenses
• Payments are predicable
• Can refinance to a lower rate
Cons:
• Interest applies to the entire loan amount
• Can’t add to the loan amount once it’s finalized
• Long repayment terms are possible
Secured and Unsecured Debt
Now is a good time to touch on secured vs. unsecured debt (and why credit card debt is especially pernicious). Mortgages, HELOCs, home equity loans, and auto loans are secured by collateral: the home or car. If you stop making payments, the lender can take the asset.
An unsecured loan does not require the borrower to pledge any collateral. Most personal loans are unsecured. The vast majority of credit cards are unsecured. Student loans are unsecured, and personal lines of credit are usually unsecured.
That means lenders have no asset to seize if the borrower stops paying on unsecured debt. Because of the higher risk to lenders, unsecured credit typically has a higher interest rate than secured credit.
Which leads us to the common credit card trap: The average annual percentage rate (APR) for credit cards accruing interest was 22.63% in early 2024 … and rising. The APR on a credit card includes interest and fees.
Perhaps you can see how “revolvers” — borrowers who carry a balance month to month — can easily get caught in a trap. The average household of credit card revolvers owes $6,380 according to recent data from TransUnion. Some owe much more.
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Types of Revolving Credit
As we discussed earlier, common types of revolving credit accounts include HELOCs, credit cards, and personal lines of credit. Each type has features and benefits that are worth knowing.
A credit card, for instance, is convenient to use — especially for everyday purchases — and may come with extra benefits like rewards programs, airline miles, or cashback offers. Depending on the card, you might also have access to purchase protection, which reimburses you for damaged or stolen items.
With a HELOC, you leverage your home’s equity to get the funds you need, up to an approved limit, during a typical 10-year draw period. A HELOC can be a good option if you’re looking to pay for home improvements or ongoing expenses or to cover a financial emergency.
Have a less-than-predictable income or facing a major ongoing expense, like a home renovation? If you have good credit, a personal line of credit may be the right choice. It’s flexible, so you can withdraw money as you need it, though your lender may set a minimum draw amount.
How Revolving Debt Can Affect Your Credit Score
Both installment and revolving debt influence your score on the credit rating scale, which typically ranges from 300 to 850.
Your credit utilization ratio is a big factor. It’s the amount of revolving credit you’re using divided by the total amount of revolving credit you have available, expressed as a percentage.
Most lenders like to see a credit utilization rate of 30% or lower, which indicates that you live within your means and use credit cards responsibly.
The most important element of a FICO® Score is payment history. It accounts for 35% of your credit score, so even one late payment — a payment overdue by at least 30 days — will damage a credit score.
And unfortunately, late payments stay on a credit report for seven years.
Tips for Managing Revolving Debt
Ideally, we’d all avoid interest on credit cards by paying off the balance each month. But if you do carry a balance, you have plenty of company. Forty-six percent of Americans carry a balance on active credit card accounts, recent data from the American Bankers Association shows.
If your revolving credit card debt has become unwieldy, there are ways to try to get it under control.
Budget Strategies
The fastest ways to pay off debt call for creating a budget to plan how much you will spend and save each month.
With the avalanche method, for example, you pay off your accounts in the order of highest interest rate to lowest. The 50/30/20 budget works for some people: Those are the percentages of net pay allotted toward needs, wants, and savings.
Debt Consolidation
Do you have high-interest credit card balances? You may be able to transfer that debt to a credit card consolidation loan.
Consolidating high-interest credit card balances into a lower-rate personal loan will typically save you money. Most personal loans come with a fixed rate, which results in predictable payments, and just one a month.
Installment loans do not count toward credit utilization. So using a personal loan to pay off higher-interest revolving debt will lower your credit utilization ratio (a good thing) as long as you keep those credit card accounts open. (Yes, closing a credit card can hurt your credit score.)
Homeowners using a home equity loan or HELOC to consolidate high-interest credit card debt can substantially lower their monthly payments. However, their home will be on the line, and closing costs may come into play.
Another method, cash-out refinancing, is a good move only when a homeowner can get a better mortgage rate and plans to stay in the home beyond the break-even point on closing costs.
Balance Transfer
A balance transfer card is another way to deal with high-interest debt. Most balance transfer credit cards temporarily offer a lower or 0% interest rate. But they may charge a balance transfer fee of 3% to 5%, and they require vigilance.
Make one late payment on the new card, and you’ll usually forfeit the promotional APR and have to pay a sky-high penalty APR. You’ll need to keep track of the day when the promotional rate expires so any balance is not subject to the high rate.
Debt Settlement
A debt settlement company may be able to reduce a pile of unsecured debt. There are many drawbacks to this route, though.
You will usually stop paying creditors, so mounting interest and late fees will cause your balances to balloon. Instead, you’ll make payments to an escrow account held by the debt settlement company. Funding it could take up to four years.
What’s more, your credit scores will be damaged, there is no guarantee of a successful outcome, it can be very expensive, and if a portion of your debt is forgiven, it probably will be considered taxable income.
This and bankruptcy options are considered last resorts. If you do go with a debt settlement company, know that those affiliated with the American Fair Credit Council agree to abide by a code of conduct.
Credit Counseling
A credit counseling service might be able to help. The Federal Trade Commission advises looking for a nonprofit program, but it adds that “nonprofit” does not guarantee that services are free, affordable, or even legitimate.
Look into credit counseling organizations affiliated with the National Foundation for Credit Counseling, National Association of Certified Credit Counselors, or Financial Counseling Association of America.
The Department of Justice keeps a list of approved credit counseling agencies. Also check with state and local consumer agencies.
A credit card hardship program addresses temporary setbacks. However, not all card companies have one.
The Takeaway
Revolving credit offers flexibility, but if left unchecked can devolve into runaway revolving debt. Credit card debt is especially pernicious, thanks to high interest rates charged to revolving balances. Debt consolidation, one approach to tame mounting revolving debt and the stress that comes with it, aims to lower your monthly payments.
Another option to consider is a lower-interest loan. It will result in a smaller monthly payment amount and just one payment to keep track of each month. The personal loan tends to be funded fast, has a fixed rate, and usually comes with no fees required.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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