What is revolving debt, and how is it different from “normal” debt?

When applying for a credit card, you may have come across the terms “revolving credit” or “revolving debt”. Perhaps you thought it makes no difference what the debt is called – debt is debt, right?

But whether you take out revolving debt or “normal” debt can make a difference. We take a look at both types of debt and conclude with some handy advice.

Tip: Whichever debt you may have, if you’re struggling to meet payments, it’s best to get help.

A recap of “normal” debt

Normal debt, such as personal loans, has a fixed monthly repayment. This means that it’s consistent and it will slowly decrease over time.

According to Ernest Zamisa, financial planner at Momentum, debt should not be the first option you consider when you’re making money moves. However, he understands that it could be the quickest and most convenient option during an emergency – especially if you don’t have any other choice.

“Similarly, if you take out a loan with an institution, such as when you finance a house or vehicle, and you can afford the monthly instalments for that particular loan, this debt could come in handy. It may even simplify your life if you manage and service the loans accordingly,” says Zamisa.

He points out that these loans can make money available to someone who wouldn’t have access to it otherwise. For example, it may not be feasible to save for a large asset, such as a house or car.  

“Creditors require you to be disciplined and committed to a specified term without prejudice and, in some cases, you will be requested to sign surety to the amount of the loan,” says Zamisa.

READ MORE: Do interest rates really matter when settling debt?

What is revolving debt?

With a good understanding of what normal debt is, we need to consider how this is different from revolving debt. This has a variable interest rate and, although you have to repay everything you've borrowed, you're not held to a strict payment schedule. 

Zamisa says that this kind of debt may be a more lenient and flexible way to access credit and funds at short notice. 

“You could pay back the credit amount that’s used within a month, including the interest charged on the debt, and still have access to the repaid funds,” says Zamisa.

He explains that revolving credit is designed to reward you with extra cash at a specified interest rate, depending on your credit score and financial behaviour.

“This allows you to easily have credit at your disposal and a repayments instalment that may be to your convenience. In principle, it’s an ideal method of accessing extra funds to supplement your requirements at short notice,” says Zamisa.

Revolving credit, specifically regarding credit cards, allows you to quickly build a good credit record with financial institutions. However, this is only applicable when you meet your payments.

How to handle any debt

“The best advice is to pay your debt every month, to maintain good standing with your creditors and, most of all, to stay within your affordability,” says Zamisa.

He suggests considering the following when taking out normal and revolving debt:

• Interest charged on the debts
• The term of the debt
• Monthly instalments
• Total cost of the funds borrowed

“You should avoid taking out debt unless there is a clear path of repayment,” says Zamisa.

“It’s best to be prepared for the worst, but make plans for the best as well. By consulting a professional financial adviser or debt consultant prior to taking out debt, you will be able to make a responsible decision,” he explains.

If you can’t handle your debt burden, sign up for debt consolidation and get it settled sooner.