If you are new to the wide variety of credit accounts that exist in the world of personal finance, it would be understandable if you are slightly overwhelmed by all the options available to you. From revolving credit accounts and installment loans all the way to credit card cash advances and credit lines, it can be a lot to take in.
If you are thinking about expanding your credit mix with different types of revolving credit, we’ve got you covered with a full explanation of credit limits, credit access lines, and cash advances.
The Difference Between Revolving Credit and Loans
So, what is it exactly that sets revolving credit apart from other kinds of debt? Installment credit refers to all sorts of loans, from mortgages and auto loans to personal loans and payday loans online. With installment loans, the borrower receives the entire balance of the credit amount at the signing of the loan contract. After which, the borrower is to repay the entirety of the loan in fixed monthly payments within the number of months or years set in the loan terms.
In contrast, a revolving credit account such as a credit card or a home equity line allows the borrower to spend borrowed money, pay it back, and spend it all over again month to month. Revolving credit typically has a set credit limit, i.e., a maximum amount, that you can spend all at once or in bits at a time. These revolving credit accounts will have a minimum payment that must be met at the end of each monthly billing cycle, though you can pay more whenever you like.
The most commonly used form of revolving credit is credit card accounts. The credit card issuer sets a credit limit for your card, and whatever you don’t spend of that limit is called available credit. As each billing cycle comes to an end, you will receive a credit card statement that will show your current balance, interest charges, and the minimum payment due that month.
Credit Access Line or Credit Limit?
By now, everyone is likely familiar with what a credit limit is on a revolving credit line. Your credit limit on your credit card is the maximum amount of money you can borrow through spending transactions. But many people are still unaware of what precisely a total credit access line is and how it differs from a credit limit.
Credit access lines are not as common as normal credit limits. They are only offered by some banks and credit card companies, most notably Chase bank. Chase provides the option of upgrading from a credit limit to a credit access line on their Chase Credit Card. Access to this credit line allows customers to borrow money over their credit limit without being charged the typical over-limit fee. Put simply, a credit access line allows borrowers to spend more than their credit limit without having to get a credit limit increase.
Not all credit card issuers include this option for their products. Additionally, this lack of any real credit limit can make your normal minimum payment and interest charges on your monthly statement much higher, making your bills hard to afford.
Cash Access Line
A cash advance limit is a bit more common with credit cards. A cash access credit line is the amount of available credit you can get in a cash advance. This cash advance limit is usually included in your total credit access line, but what percentage of your limit depends on your card issuer.
An online advance loan paid in cash is not a financial product that should be relied upon often, but it can be a good option when your choices are limited.
Pros of Cash Advances
While a cash advance is not often recommended because of its high-interest rates and fees, it has some notable benefits to choosing a cash advance over other options.
Though a cash advance should remain a last resort option, if you are in serious need of some extra cash flow to get through to your next paycheck, then a cash advance could be the safer option to other short-term, bad credit loans.
When you get credit card cash advances, you know that you are working with a reputable company with which you have been a customer for a while. Though the annual percentage rate (APR) may be high, it will likely be more affordable than a predatory financial institution you might come across.
Cons of Cash Advances
That being said, it’s important to know that the benefits of a cash advance are limited and should not be used regularly. The interest charged by a cash advance APR is incredibly high.
Additionally, cash advance fees are typically charged on top of the interest rate. We advise you to only use the cash advance option at your financial institution if it is absolutely necessary.
The Dangers of Overspending
While the idea of a credit line not having a limit can be exciting, the existence of credit access lines can increase the risks and subsequent dangers of overspending. Overspending has the potential to not only blow your monthly budget, but it can lead to problem debt and a poor credit score.
Problem Debt
Overspending and, even worse, compulsive spending can lead to an overwhelming amount of debt that is incredibly difficult to pay off. When you wrack up too much credit card debt, it can become so out of control that you can no longer afford to pay the minimum payments.
Since credit cards have variable interest rates, the interest rate charges on one or more of your cards can increase rapidly as your balance goes up.
Credit Score
Using up the entirety of your credit line, so there is little to no available credit remaining negatively impacts your credit report. Overspending and heavy reliance on your credit card can hurt your credit score, further damaging your financial opportunities in the future. Late payments and high credit utilization adversely affect your credit score.
Importance of Credit Utilization Ratio
A good credit utilization ratio is vital to a healthy credit score and responsible credit card usage. Your credit utilization rate compares the amount of money you owe on your credit line and the amount of available credit you still have.
Most financial experts recommend a credit utilization rate of 30% or lower for an optimal credit score and to stay out of problem debt. For example, that would mean if you had a credit card with a credit limit of $1,000, you would want to try to keep your balance at around $300 or below with available credit at $700.
How to Reduce Your Credit Utilization
If your current credit utilization is much higher than 30%, it might be a good idea to start using your debit card more often than your credit card. Take a break from new transactions adding to your credit card balance while you pay higher than the minimum payments for a couple of months. Once you are able to reduce your debt and increase your available credit, maintain that lowered credit utilization.
Tips for Responsible Credit Line Use
Using a line of credit wisely is one of the best ways to boost your credit score. A good credit score could give you access to financial opportunities you’ve never had before. You can borrow more money with lower interest rates, get approved for the best rental properties, and get excellent insurance rates.
Doing what you can to be responsible with revolving credit will work wonders for your financial health. Here are a few tips for handling your credit limit on your credit cards wisely:
- Steer Clear of Credit Limits
Do not make a habit of approaching your credit limits with your credit card balances. As mentioned previously, your credit utilization can significantly impact your credit score. Allowing your balance to get too high and stay there could lead to problem debt and unaffordable monthly payments.
Instead of making all your purchases with your credit card, rely on your checking account more often, so you know that you are spending money you actually have.
- Pay More Than the Minimums
If you have the ability, always pay more than the minimum payment required on your credit card statement. The interest rate on revolving accounts is usually a variable rate, meaning it can rise and fall without notice. Sometimes the interest rate can make the minimum payment have little impact on the principal balance.
For an even better result, we suggest paying off the total amount on your credit card balance every billing cycle. If your income gives you this ability, your credit utilization would be perfect, and you’d protect yourself from interest charges.
- Limit the Number of Revolving Credit Accounts
Don’t have too many credit cards. It can be easy to get a little carried away, especially when you are offered special rewards or introductory promos. But too many revolving credit accounts are a recipe for disaster.
Paying minimums and interest on multiple accounts can add up surprisingly fast. Borrow only what you need and then wait for credit limit increases instead of applying for new cards.
- Avoid Late Fees
Many credit card companies have a short grace period directly after the payment due date. But after a couple of days, you will likely have a hefty late fee on your hands. Constant late fees will put a strain on your finances, and the late payments will show up on your credit report, harming your FICO score.
A good trick to ensure you don’t get any more late fees is to set up automatic payments with your credit card issuer. You can program them to withdraw a specific amount from your bank account before the due date every month.
- Check Your Credit Report
Performing a credit check on your own report with each of the credit bureaus is vital to healthy credit. Check your credit regularly and often allows you to catch any errors, inconsistencies, or instances of identity theft before they damage your credit score.
It’s your right as a consumer to retrieve information from the credit bureaus at absolutely no cost once every year. You can dispute any inaccuracies you find immediately so that you won’t be weighed down by false information.
References:
Glossary | Credit Card | Chase.com
How to Use a Credit Card Wisely – MintLife Blog
What You Need to Know About New ‘Credit Access Lines’
