What is revolving credit?

The word “Credit” needs no explanation to the average Joe. However, the best way to explain revolving credit might be to explain what it is not.

Every day, there are many credit adverts in print, non-print, and social media. Three things are common to these credit products – Principal, tenor and interest rate. The principal is how much you borrow (e.g. NGN 120,000), while the tenor is how long you intend to pay back the principal (e.g. 6 months) and interest is the cost of borrowing money from a lender (e.g. 5%). Therefore, in this instance, if you borrow NGN 120,000 for 6 months at 5%, you are expected to payback NGN 20,000 in principal every month for 6 months, and NGN 5,000 in interest, every month for 6 months. This is a non-revolving credit. It is time-bound and the fact that you got it doesn’t guarantee future access.

A revolving credit, on the other hand, is extended to you by your credit partner. This is usually based on the availability of assets (securitized) or cashflow (unsecuritized) by you. The credit partner performs some analysis on your assets or cashflow and comes to a safe credit line for you.

A typical example is when you apply for a revolving credit and based on review, you are offered NGN 100,000 (hypothetically). This credit line is NOT principal. It is an assurance that anytime you need money of up to that amount (NGN 100,000) your credit partner is ready to step in and finance it for you. Therefore, in a revolving credit scenario, the terms that apply are; Credit line, credit used, interest and billing date.

Ideally, the main difference between the two lines of credit is that revolving credit is always available to you as long as you pay up your credit balance while non-revolving credit is not. You also only pay for the amount you spend not on the total amount. Lastly, any amount paid before the billing date is usually interest free while only the amount carried over attracts interest.

In a hypothetical scenario, Amaka applies for a revolving credit and after review, she was offered a credit line of NGN 100,000. The credit partner’s billing date is 26th of every month. On the first month, Amaka spent NGN 50,000 but could only pay back NGN 25,000 before the 26th of the month – the billing date. On the 26th of the month, her credit partner will send her a bill of NGN 25,000 (being outstanding bill for the month) with the applicable interest rate. This means that in the second month, Amaka now has NGN 75,000 available because there is an unpaid amount of NGN 25,000 outstanding from the previous month. If Amaka pays up the whole NGN 50,000 before the end of the month, the credit partner charges her no interest. This means she settled her account and have NGN 100,000 line of credit with her partner.

In summary, revolving credit are better for day-to-day transactions and bills such as your gym subscriptions, video and music streaming services, fuelling your car, your cab hailing bills, etc. This is because it only bills you for credit used. Furthermore, it creates the right buffer to ensure that you are not financially stranded, and it has a faster impact on your credit score.

At Boon, we provide easy access to revolving credits with generous limit. We intend to launch soon, please join our waitlist and be the first to know.

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