Definition:
Revolving debt is a type of credit that allows a borrower to borrow, repay, and borrow again up to a set limit—most commonly seen with credit cards and lines of credit.
Example:
Jason has a credit card with a $10,000 limit. He currently owes $3,000. He can choose to pay the full amount or just the minimum. As he pays down the balance, that credit becomes available again—making this a form of revolving debt.
Explanation:
Revolving debt differs from installment debt (like car loans or mortgages) because there’s no fixed end date or set monthly payment. With revolving accounts, borrowers have the flexibility to carry a balance or pay it off entirely. Credit cards, home equity lines of credit (HELOCs), and some personal lines of credit fall into this category.
When applying for a mortgage, lenders carefully review a borrower’s revolving debt. High credit card balances, especially if they’re close to the credit limit, can negatively affect your debt-to-income (DTI) ratio and credit score, both of which play a big role in loan approval and interest rates.
Lenders consider:
- Current balance vs. credit limit (credit utilization)
- Payment history
- Minimum monthly payments required
- How many open revolving accounts do you have
Borrowers with high revolving debt may need to pay down balances before getting approved for a mortgage or may qualify for a smaller loan.
Why is Revolving Debt Important in Real Estate Transactions?
Revolving debt affects your ability to qualify for a mortgage, the size of the loan you can get, and the interest rate you’ll pay. Keeping low balances and making on-time payments can boost your creditworthiness. For both buyers and sellers, understanding how revolving debt impacts financing is key to navigating a successful real estate transaction.