What’s a Revolving Line of Credit and Is It Right for You?

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

revolving line of credit

If you’ve ever ordered a drink at a bar and coolly said, “Put it on my tab,” then you already know how a revolving line of credit works.

Revolving credit allows you to make a purchase with someone else’s money — in this case, the bar’s — and eventually repay it with your own. Once you pay up, your line of credit returns.

In the real world, a revolving line of credit could become an attractive and useful option for life’s more serious expenses. Let’s zero in on its definition and discuss the pros and cons.

What’s a revolving line of credit?

A line of credit gives you access to a set amount of money over an open-ended period. You only become responsible for interest once you decide to borrow from that amount.

Unlike other credit lines, a revolving line of credit revolves — or refills — when it’s repaid. That’s also how credit cards work.

Say your credit card limit is $5,000. If you make and pay off a $1,000 purchase, your card limit (or revolving line of credit) would increase from $4,000 to $5,000.

Companies often opt for revolving lines of credit to account for ongoing business expenses. Like business lines, personal lines of credit can be found via lenders such as banks and credit unions. You could use the funds for anything, even connecting it to your checking account for overdraft protection.

Like installment credit or loans, lines of credit can also be secured or unsecured. A secured line of credit, for example, would require you to put up collateral.

If you have a savings account, for example, you could use the money in it to get a lower interest rate on your revolving credit line at the same bank. On the downside, the savings account could be seized if you fail to repay your line of credit.

Unsecured lines of credit are more common and don’t require you to expose collateral. Your quoted interest rate on the credit line would likely be higher unless you have an excellent credit score.

6 pros and cons of revolving credit

Like all financial products, a personal line of credit isn’t the right choice for every borrower.

Take a moment to review its pros and cons to help determine whether you’re better off considering personal loan options.

1. Pro: You can borrow for ongoing expenses

Many installment loans require you to borrow a specific amount. A line of credit, on the other hand, could be used partially or completely.

Maybe you opt for a $15,000 line of credit over a home improvement loan because your project includes ongoing, unpredictable costs. If you could end up only borrowing (and having to repay) $10,000, you wouldn’t be responsible for repaying interest on the unused $5,000.

There’s another plus. Say you use all $15,000 of your line of credit and repay it. It’ll revolve back to $15,000 without you having to apply for a new line of credit or loan amount.

2. Pro: You can use a line of credit for just about anything

Installment loans also often have express purposes. Private student loans, for example, are typically disbursed directly to schools and applied toward eligible academic expenses.

With a line of credit, however, you might decide to use some or all of your line of credit on different types of expenses.

A home equity line of credit (HELOC), for example, is often used for home improvement, but it could also be used for a vacation.

Remember, however, that just because a line of credit could be used for an expense doesn’t mean it’s a wise choice. You wouldn’t want to pay for a trip to Hawaii with a HELOC because it’s a secured line of credit. You’re required to put your home up as collateral, meaning that it could be seized if your repayment goes south.

Even with an unsecured line of credit, it wouldn’t be smart to use funds for frivolous spending because you’ll be responsible for accruing interest on those purchases.

3. Con: Watch out for higher interest rates

Although you only have to pay interest on what you borrow from your line of credit, interest rates on lines of credit can be higher than those of personal loans from top lenders.

At Wells Fargo, for example, borrowers in California with excellent credit scores (760 or above) were quoted rate ranges of 10.50% to 15.00% for a $20,000 line of credit as of May 1, 2018. California borrowers with the same great credit, meanwhile, were quoted rates between 7.23% and 11.50% for $20,000 personal loans. Make sure to check with Wells Fargo for the most up-to-date rates.

4. Con: You might encounter variable interest rates

Interest rates on lines of credit, like credit card APRs, are variable, meaning that they could increase over time. There are also adjustable-rate lines of credit, which allow the lender to adjust the interest rate on your current balance or future charges.

If you decide to open a line of credit, ensure you sign on with a lender that explains why rates could rise and by how much. If a lender says your interest rate could rise to 20.00%, for example, run through scenarios to ensure you could afford repayment.

Say you spend all $10,000 of your credit line and need to repay it at that higher 20.00% rate. You’d be responsible for $2,000 in interest on your next payment. Otherwise, interest would begin to accrue and capitalize, as it does with other types of credit.

5. Pro: You can score lower rates if you’re creditworthy

Like with personal loans, lines of credit are lent based on your credit profile. The better your credit score, the better the rate you can receive.

Here is how Wells Fargo calculates rates on $20,000 lines of credit for borrowers of varying credit scores:

  • Excellent (score of 760 or above): 10.50% to 15.00%
  • Good (700 to 759): 10.50% to 18.25%
  • Fair (621 to 699): 18.25% to 21.25%
  • Poor (620 and below): 20.00% to 21.25%

The difference in rates could be meaningful. Repaying $20,000 at 15.00% would cost you $3,000 in interest if you repaid it in one lump sum. But repaying $20,000 at 20.00% would come with a $4,000 interest charge.

6. Con: Repayment is less straightforward and could be stretched

Like credit card accounts, lines of credit are open-ended. You don’t repay what you borrow over a set period.

That might sound preferable, but without an established monthly payment and a final payment deadline, you might be more likely to let your debt grow.

If you elect to open a line of revolving credit, ensure you have a plan to repay it. Use a payoff calculator to set a debt-free deadline. Otherwise, capitalizing interest could balloon your balance.

Is a revolving line of credit right for you?

If your income varies month to month, or if you have unpredictable expenses, a revolving line of credit could be the right way to fill in the gaps of your finances. You could borrow what you need and repay it at an interest rate befitting your credit score.

Although your credit score could lower your introductory interest rate on a line of credit, it could also take a hit if you tap into most or all of your credit limit. After all, “amounts owed” account for 30% of your score, according to FICO.

Borrowing a high percentage of your credit line — or having a high credit utilization ratio — could negatively impact your credit score. But using a smaller percentage of your line of credit could increase your score too.

Still, revolving credit isn’t the right choice for everyone, especially if you could score a lower interest rate on another product. Compare lines of credit and personal loans to decide which is best for you.

Note: Student Loan Hero has independently collected the above information related to Wells Fargo personal loans and lines of credit. Wells Fargo has neither provided nor reviewed the information shared in this article.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.325% APR to 15.615% APR (with AutoPay). Variable rates from 6.275% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of July 3, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
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6.28% – 15.62%1$5,000 - $100,000
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6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.