Is revolving credit bad for your credit score?

Is revolving credit bad for your credit score?

Published on 30th March, 2022 at 10:18 am

What is revolving credit, and can a use or lack of it influence your credit score significantly? We found out from the experts.

What is revolving credit anyway?

Revolving credit is a type of credit you’re probably already using. As the name suggests, this type of credit revolves by continuing indefinitely for you to access as you need it. If this sounds a lot like how you use a credit card, that’s because credit cards are a type of revolving credit product. Ayanda Ndimande, business development manager of Retail Credit at Sanlam adds that revolving credit doesn’t have a fixed number of instalments that need to be paid within a certain time limit, like those common in vehicle financing or property bond agreements.

With revolving credit, you’d approach a lender (say, a bank) and sign a credit agreement that allows you to borrow money repeatedly up to a certain limit while repaying a portion of the current balance due in regular payments. The lender determines whether and how much you can afford to borrow based on various factors, including information on your bank statements and salary slips, and history logged against your ID. Your ID is used to check your credit score, which lenders also consider when deciding how much credit they can offer you.

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Revolving credit and your credit score

Revolving credit isn’t inherently bad, but just like with any form of credit, if you use it irresponsibly, it can harm your credit score. Kriben Reddy, vice president Head of Consumer at TransUnion Africa, discusses how revolving credit can help improve your credit score.

“If you use it responsibly, it can be a powerful tool in your financial toolkit. It is essential that you only spend what you can afford to repay, and that you meet your monthly payments. Where revolving credit hurts your credit score is when your utilisation levels are high; if you are maxing out your credit and store cards, it will have a negative effect on your credit score. Equally, if you apply for too many credit products over a short space of time it can be viewed as a sign of financial stress.”

Use these tips to manage your credit responsibly and boost your credit score today.

Do you really need revolving credit?

It’s true that having various types of credit in your name can help your credit score. With that said, Reddy points out that even more important is your credit utilisation, ie how much of your credit limit you use at any given time – and whether you meet your repayment obligations on time.

To understand whether you need revolving credit, the experts suggest asking yourself these questions:

  1. “What do I need the revolving credit for?”
  2. “How much revolving credit do I need to access?”
  3. “How much can I afford to pay monthly?” “Have you updated your budget and worked out exactly how much you can afford to pay back every month?” asks Russel Dickerson, a debt counsellor at RD Debt Counselling. “Don’t take a facility higher than this, no matter how attractive more money sounds.”
  4. “Will this credit make a positive impact on my life, or will it only give me short-term satisfaction, to be paid back in the long term?”

If your answers to these questions are either uncertain, or show that a credit agreement could hinder your ability to cover your existing expenses and save for future purchases, give your application a second thought.

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Want to know the difference between good and bad credit? Read this.

Got revolving credit? Be smart with it

Right – you have existing revolving credit or your application has been approved. How do you use it responsibly to ensure your finances stay in check, and your credit score benefits? Reddy suggests these tips:

Revolving credit tip #1: Pay in full every month

“If you can’t do that, at least keep making your minimum payments on time, every month,” he says. Even better, if you can pay more than the minimum owing, do it.

Revolving credit tip #2: Don’t even use half!

There’s a common misconception that the maximum credit you’re allowed is what you can and should comfortably use. The truth is that your credit utilisation should sit at no more than 35% of the limit granted by your lender. “For example, if you have a credit card or a store account with a limit of R1 000, try to keep the amount-owing balance under R350,” says Reddy. “The lower you can keep your utilisation, the better for your credit score (and your overall finances).”

Revolving credit tip #3: Stay on top of your overall finances

You can’t plan your next financial step without having a holistic view of your current standing. This is where an up-to-date credit report is important. “Do you know what you currently owe your lenders? Have you pulled your credit report recently to see whether you have debts you are unaware of?” poses Reddy. “Do you have any defaults or judgements against you that need sorting out? The more you understand your current financial health, the more realistically you can set limits as to what you can afford.”

With Sanlam Credit Solutions, you can understand and manage your credit profile – an important step in living with confidence. Register for free, here.

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