There are basically two major types of credit in Canada – revolving and non-revolving credit. And to access any of these credits, you must have an account. A revolving account is a kind of credit account that issues borrowers a maximum limit. It also allows users to have varying credit availability.
With revolving accounts, there are no specific credit maturity dates. Your credit can remain open for as long as your credit score is in good standing with your lender. Generally, revolving credit goes into a revolving account.
Revolving credit is a kind of credit that gives room for fluctuations. Borrower’s balance and minimum monthly payment can vary. Also, a cardholder can avoid interest rates by paying the last statement balance with the stated validity period.
A credit card is the most prominent type of revolving credit. Other types include Home Equity Lines of Credit (HELOCs) and retail cards – department, store, etc.
Understanding a Revolving Account in Canada
Unlike other credit forms, a revolving account does not automatically close when your account balance hits rock bottom. Your account will remain open and available for use with a revolving account until either you or your lender decides to close it.
A revolving credit account offers you a credit limit you can borrow against. It is more flexible as it provides an open line of credit up to a credit maximum. Bear in mind that, like all credit types, revolving accounts can influence your credit score either positively or negatively, depending on how you use them.
If you don’t have a credit history, you might need a starter credit card to get started. Ensure to make timely payment as that is the single most significant factor in your credit score.
With a revolving account, you have the flexibility to have an open credit line up to the maximum specified limit stated by your lender. You can also apply for a revolving or non-revolving credit. Note that revolving credits are linked with accounts that have a revolving balance.
Types of Revolving Credit Accounts in Canada
There are several types of revolving credit account in Canada. They are:
- Credit cards
Most people utilize credit cards to make everyday transactions or pay for emergencies. Some credit cards in Canada come with rewards and benefits. You can leverage these rewards and benefits to your advantage.
- Personal lines of credit
Similar to credit cards, a personal line of credit is not connected to a physical card. Instead, funds are disbursed via check or a direct deposit into your bank account.
- Home equity lines of credit
A home equity line of credit is an open-ended credit account. This type f account allows you to borrow money against the value of your home. Since it is an open-ended credit account, you can borrow and repay the funds several times. This is applicable as long as you don’t exceed the stated credit limit.
Bear in mind that the home equity line of credit is not similar to the home equity loan. A home equity loan is a huge sum of money that comes with a fixed interest rate that you borrow once.
Obtaining a Revolving Account in Canada
Both individuals and businesses can obtain a revolving account in Canada. To do this, you’ll need to go through the standard credit application process. This application process evaluates prospective borrower’s worthiness using their credit history and debt-to-income ratio.
During the evaluation process, the lender will review whether a borrower is qualified for credit approval and the amount the lender is willing to lend. Once you get approval for a revolving credit account, the lender will give you a maximum credit limit. Also, you will get the account interest rate terms and conditions.
Credit Score’s Influence on Revolving Account
Generally, revolving credit accounts takes a majority of your credit score, hence why it is advisable to make the minimum monthly payments to your lender monthly. This is to keep your credit score in good standing.
If you miss any payment on your revolving account, your lender will treat it the same as other delinquent payments. Most lenders give the grace of 180 days of a missed payment before taking the default action, while others give 60 days. If you default on any of your payments, your lender will close your account, and you’ll be reported. This action will affect your credit score severely.
In the case of default, the borrower’s account would be closed, and a default would be reported, resulting in an even more severe credit score reduction. To avoid missing your payments, you can set up autopay on your accounts.
Also, it is advisable to offset your credit card balance monthly fully. However, if you cannot do this, try to keep your balance below 30% of your available credit. Credit scores are vital to your credit utilization ratio. The amount of revolving credit you get is relative to your total credit limit; hence, why a credit utilization ratio of over 30% can hurt your credit score.
To determine your credit utilization ratio, divide your total credit card balances by your overall credit limits. Note that opening and closing a revolving account can also hurt your credit score in several ways.
How to Maintain a Revolving Account
Revolving accounts have no maturity date and will remain open as long as both parties choose to keep them. It is advisable to keep your credit score in good standing with the lender to continue enjoying your credit’s perks.
One of the most significant factors that can help you maintain your revolving account is your available credit. Your available amount varies per payment, purchases, and interest accrued.
Revolving accounts allow you to use the borrowed funds up to the account’s maximum limit. You can maintain your account via monthly account statements that show your available account balances and required outstanding payments.
Your monthly payments on revolving accounts will vary with any additions and deductions you make on any of your accounts. Once you make a transaction, your outstanding balances increase, thereby decreasing your available credit.
Also, when you make a payment, your outstanding balance decreases, and your available credit increases. This is why a borrower’s balance and available credit is not static; it varies monthly.
At the end of each month, your lender will evaluate your monthly interest and issue you with the amount you must pay to keep your account in good standing. This payment includes a part of the principal and interest accrued on the account.
The balance in your revolving account is accrue based on your transactions and payment history. On the other hand, interest is accrued monthly based on the amount of daily interest charge throughout the month.
Closing your Revolving Account
When you close your revolving account, your payment status will be updated. Instead of displaying “Open,” it’ll be showing “Closed.” Also, your account details will show if there are any outstanding balances, if your account payments are recent, you’ve had any late payment.
Closed revolving accounts will remain on your credit report until you pay them off. If you have a delinquent account, it would be deleted seven years from the account’s initial delinquency date. If you’ve never had a late payment, they will stay ten years from the closed date.