Your credit history is an important part of your financial life. A good credit history can mean better loan rates, and big savings in other areas. You have more financial options when your credit score is based on a good credit history.
One of the essential pieces of your credit puzzle is revolving credit. Revolving credit can help you build your credit history so that you show a good face to lenders, insurers, and other financial services providers that use your credit history as a gauge of how reliable you are likely to be.
What is Revolving Credit?
Revolving credit is credit that you use continually. The most common example of a revolving credit account is a credit card. Another example is a home equity line of credit. With revolving credit, you are issued a credit line, and you can continue to borrow, up until the point at which you reach your limit. As you make payments, you free up “room” to keep borrowing. The main advantage to revolving credit is that it is always available to you — as long as you keep your balance down. You don’t have to reapply for a loan each time you want access to credit.
Your credit history requires the revolving credit component because it shows that you manage your finances in such a way as to make regular payments, and avoid always maxing out your credit line.
Using Revolving Credit to Build a Good Credit History
One of the easiest loans to get is a credit card. This is why so many people use credit cards to establish and build their credit. When you use a credit card to build your credit history, there are two main components reported to the credit reporting agencies:
Payment history: Since you make payments each month, you have the opportunity to build a positive report by paying on time, and by paying the full minimum requirement (although it’s better to pay the entire balance each month). Many credit reports include your monthly payment history for three years. This makes it easy to quickly build a positive history.
Balance: Your revolving credit is also used to determine your credit utilization. This means that your credit score takes into account your reported credit line, and compares it to your reported balance. For best results, keep the balance on each credit card at 30 percent of your available credit limit. The closer you are to maxing out your line of credit, the bigger hit your credit score will take.
It can be very effective to use a credit card to make a few purchases each month, and then pay off the balance. You show that you can handle the credit, and you can quickly build a good history showing your good habits.