Revolving credit, a form of consumer credit, is also called “permanent credit”, “revolving credit”, “reconstitutable credit” or “money reserve”. It is characterized by the loan of a sum of money available at any time by the borrower. This sum of money is made available in a particular account, and the borrower can use this sum as he wishes. It is partially reconstituted as and when your reimbursements.
Revolving credit is associated with a credit card, directly linked to the specific account where your loan is available, and which can be used in partner establishments. Revolving credit is very flexible in nature (you can buy what you want when you want) but it is a relatively expensive loan due to the high interest rate.
Revolving credit is distributed by banks and credit institutions, but is also available from retail chains. Widely used by a majority of creditworthy clients for small amounts, revolving credit is also one of the main causes of over-indebtedness.
Types of revolving credit
There are two types of revolving credit:
- on the one hand, the line of credit. It is then a renewable overdraft authorization. This is linked to the borrower’s bank account, which then uses it as a cash reserve.
- on the other hand, the credit card. Revolving credit is then associated with a bank card itself linked to an account opened with the creditor. This name card is issued either by certain stores or by certain financial organizations.
Revolving credit term
The revolving credit has a duration of one year, and can be renewed every year. Three months before the expiry of the contract, the credit institution has the obligation to offer you a credit renewal offer. Finally, on each anniversary date, you can, if you wish, transform your revolving credit into a conventional credit for the amount that remains to be repaid.
In addition, if for 3 consecutive years you have not used your revolving credit, and if you have not used the means of payment (credit card, etc.) included in your contract, you will receive from your payment organization a letter asking you whether or not you wish to renew your credit. If you do not reply to this letter at the latest 20 days before the expiry date of the contract, it will be automatically terminated.
Revolving credit has two particularities: its interests are high on the one hand, and its monthly payments are relatively low.
High interest rates
Higher than the traditional credit interest rate, the revolving credit interest rate is almost always a rate that can be reviewed by the lender. (ie the rate changes over time depending on the economic situation).
Capped at the legal usury rate (which is defined each quarter by the Fine Bank), the TEG of revolving credit is high due to the few conditions required to benefit from it. It is effectively considered as an additional loan, released to meet a short-term liquidity need.
Note that the Average Effective Rate of revolving loans varies relatively little, unlike the rates applicable to mortgage loans.
Many credit companies will reimburse you in priority for borrowing costs (direct debit costs, shipping costs, insurance costs, etc.), thereby reducing the proportion of capital repaid. This technique lengthens the repayment period. And penalties you all the more, the revolving credit having no fixed term.