In order to understand the definition of revolving a card balance you first need to understand what a revolving credit account means: how the interest free grace period works and payment term interact. The consequences of revolving your balance may mean:
- High interest costs
- Lower risk score
- Increased interest from banks to lend you even more money
Proceed with caution!
Revolving your balance – the definition
First let’s understand what it means to revolve a credit card balance. Most credit cards (not charge cards) provide you the option to purchase something today, and pay it off later. Each month you will receive a bill showing the amount owed (the balance), along with a minimum payment amount, and the date the payment is due. You have an opportunity to utilize the card’s grace period, which is the key definition behind the real meaning of revolving your balance.
Grace Periods and Transacting a Balance
Your purchases often have an interest free grace period: the time between when you make the purchase and the end of the billing cycle, plus the amount of time the bank allows for you to make a payment. The grace period can work like an interest free loan from the card company. The interest free loan period can last as long as forty five days for purchases made at the beginning of the billing cycle.
If you pay the full amount of shown on credit card statement before the due date your behavior will be considered transacting – someone generating only interchange fees from merchants. Each time you use your card to make a purchase, that merchant pays a transaction fee which is shared by the card association, the company processing the transaction, and the bank making the loan. Transacting card-holders make incur no interest charges, and take full advantage of the interest free grace period built into most revolving cards.
Grace Periods and Revolving a Balance
Revolving your card balance means that you lose your interest free grace period privileges. There are two ways you can begin to revolve a card balance:
- You make an on-time payment for something less than the full balance owed
- You are late with one or more payments
The Consequences of Revolving a Balance
There are three primary consequences of revolving a credit card balance, and neither does you any good: interest charges, impact on your risk scores, and offers for more credit and/or to transfer your balances to another card.
You incur interest charges. The amount that remains unpaid begins compounding interest – often at very high rates. You also begin incurring interest on purchases made during the next billing cycle. The magic interest free grace period goes away. Interest charges can pile up quickly, especially when making only the minimum payment required by the card issuer.
Interest charges pile up so quickly. This gets so many unwary borrowers into trouble that laws were passed recently requiring card companies to publish the amount of time needed to repay the balance when making only the interest payment. The timeframes can be staggering.
You may suppress your credit risk score. The banks do not report whether you are paying interest by revolving your card. This information is jealously guarded by the card issuers. People who revolve balances are their best customers! Banks don’t want other lenders targeting their best customers with preapproved offers.
But your overall balances may grow while you are revolving, and higher balances and utilization will suppress your score.
Expect more card offers! When you revolve your balance the interest charges make you attractive to other card companies. They may see you carrying balances on multiple cards, and surmise that you are incurring interest charges. If you maintain a high enough credit score while revolving a balance (not always easy to do), expect to receive new offers or credit and/or zero interest balance transfer offers.
Taking on new or increased credit is not always a wise choice when you are already revolving a card – spending more than you are bringing in.
What other consequences might there be for revolving a balance?