What is revolving credit?

Revolving accounts run on a cycle. You draw funds through a purchase, a cash advance or an overdrawn balance, the lender charges interest on what is outstanding, and a statement arrives at the end of each cycle with a minimum repayment and a due date. A late payment attracts a fee and shows in your repayment history. A default listing is a separate step, and it needs an amount of $150 or more, 60 or more days overdue and a request for payment by phone or in writing, after which it stays on the file for five years.

Interest accrues daily or monthly on the unpaid balance, and rates are usually variable. Many credit cards offer an interest free period on purchases, but only while you clear the full statement balance every month. Once you carry a balance, new purchases can start accruing interest immediately, and cash advances usually attract a higher rate with no interest free period at all.

Revolving credit is reusable up to a limit, the payments vary and the finish date is open ended. Instalment credit is a fixed amount repaid over a set term with predictable repayments. Revolving suits short term cashflow and a buffer for irregular income, while instalment suits large purchases, refinancing and consolidation.

Cost tends to follow structure. Carrying a revolving balance for a long stretch usually costs more than a term loan, particularly on an unsecured card. Moving a high rate balance to a personal loan or a debt consolidation loan can cut the interest and give you a defined payoff date, as long as the fees stack up in your favour.

Anything paid above the minimum reduces the principal, and the interest that follows it. Closing an old card lowers your total available credit, which lenders read as a smaller commitment when they assess serviceability, while the repayment history stays on your file. Alerts and autopay head off late payments, and lenders have hardship processes for borrowers whose repayments become difficult.

On consumer facilities, lenders must verify identity, income and serviceability under Chapter 3 of the NCCP Act, which sets the responsible lending obligations, while the National Credit Code sets the contract and disclosure rules. Business overdrafts and business lines of credit sit outside that framework. ASIC's MoneySmart publishes guidance on cards and lines of credit, and a complaint you cannot resolve with the lender can be taken to AFCA.