If you’re of legal age in Canada you most likely own or use a credit card regularly. From loans to mortgages, credit can sometimes be a lifesaver. However, credit can get overwhelming and hard to pay off. There are various forms of credit in Canada, and revolving credit is one of them.
When it comes to credit, there are two significant types: revolving and non-revolving credit. Understanding the difference and when to apply them is crucial for your credit’s health in the long-term. Let’s take a look at what revolving credit is in Canada.
What is Revolving Credit?
Revolving credit is a form of credit that doesn’t involve a fixed number of payments (installments). Instead, a revolving credit allows you to withdraw the loan amount, repay it, and redraw the same amount again for as long as the arrangement lasts.
It is a type of credit that you can repeatedly use up to a specific limit. This is applicable as long as the account is open and you’re making timely payments.
This type of loan is also known as an evergreen loan. This means that you don’t have to reapply for a loan. Once you repay your outstanding balance, you get your credit back. With revolving credit, your amount of available credit, balance, and minimum payment can fluctuate depending on the purchases and payments you make on the account.
If you have revolving credit, you can make payment once a month, depending on the current outstanding balance. Note that the duration it takes you to repay your credit might incur an interest charge that’ll be added to the balance occasionally until you pay off your balance.
You can use revolving credit to pay another revolving credit. When this is done, it is known as a rollover credit. This is applicable only when both credits are made in the same currency and by the same borrower.
Features of a Revolving Credit
Getting a revolving credit can come in handy in an emergency. It can also help you manage your monthly finances. Although revolving credit is excellent, you should be mindful of the extra fees and interest rates. There is usually a pre-approved credit limit borrowers can’t go beyond with revolving credit.
The credit available changes as you borrow and repay your funds. You can continuously use the credit as long as you make payments. As the borrower, you are only required to make payments based on the amount you used or withdrew alongside the interest agreed upon. You can repay over time or in whole. Corporate banks may provide revolving credit that requires you to pay a fee to them for money that you don’t withdraw.
Types of Revolving Credit in Canada
There are several types of revolving credit in Canada. Credit cards are examples of revolving credits. With credit cards, you have a credit limit that must be repaid once you max out your card. The most significant perk of this credit is getting the loan back when you repay it.
The most common types of revolving credit are credit cards and lines of credit. Home equity line of credit is also a type of revolving credit.
How A Revolving Credit Work in Canada
A revolving credit involves the following;
- Withdrawal / Drawing Money
- Making Payments
Withdrawals depend on the type of credit account you have. You can withdraw money from your credit line through a transfer made to your checking account or by purchase (credit cards). There is usually a maximum amount of money you will access for a specific period. This maximum amount is known as your credit limit, and once you reach it, you start paying off the credit.
On the other hand, making payments can be done by scheduling deductions in the total amount of the credit for a while, usually months. Alternatively, by paying off the entire amount on the date, the credit will be terminated. Usually, you must pay a minimum amount every month.
Still, it is recommended that you pay more than the minimum amount because interest charges will build on the credit balance that you don’t pay on time. Hence, paying more than the minimum amount can help you if you cannot pay up to the minimum amount in one of the billing cycles.
Interest Charges on Revolving Credit
All types of revolving credit have an interest fee attached to them. However, the interest charge is not the same for all and is dependent on factors such as;
- Credit history
- The type of account you have
- The transaction you are making
This means that your interest rate may be lower or higher depending on the factors mentioned above.
Fees Attached with Revolving Credit
Revolving credit accounts depending on the type, usually charge fees like;
- Annual fees
- Foreign transaction fees
- Cash advance fees
- Origination fees
- Closing costs
Pros of a Revolving Credit
Revolving credit has several pros over other forms of non-revolving credit. Below are some of its advantages;
- Revolving credit is more flexible than other types of credit.
- It allows you to draw funds up to the credit limit, repay it and draw money again, saving you the need to reapply.
- They are exceptional for emergencies and unforeseen costs.
- It can be used for various purchases as long as the terms of the credit are followed.
Cons of Revolving Credit
The revolving credit also has some of its flaws. They include;
- It offers less purchasing power compared to traditional loans.
- You might be unable to get as many funds as you want
- It is a high-risk credit.
- The low purchasing power can also limit the purchases or transactions you can make
Revolving Line of Credit in Canada
Although similar in Lower credit limit (purchasing power), the revolving line of credits is secured by business assets. It is best used by business owners who usually experience fluctuations in sales. They also have lower interest rates when compared to credit cards. They are also low-risk compared to credit cards because your assets can secure them.
Revolving credit is outstanding for its flexibility and ease. However, it can ruin your credit score depending on how you manage it. Your credit history will reflect your revolving credit, and any missing payments will affect your credit score.
Hence, it will be advisable to manage your revolving credit account well enough to avoid ruining your credit score. Compared to non-revolving credit, you have access to a lower amount of credit and higher interest charges with revolving credit. This is due to the high risks the lenders face.
Ensure you choose an option that is suitable for your financial situation. Carefully read the terms and conditions before signing up. And once you are in, try your best to stick to the repayment agreement to avoid hurting your credit.