Revolving debt establishes a credit limit and the funds may be used and repaid over and over again. Examples of revolving debt include lines of credit, credit cards, retail cards/accounts and overdraft protection.

Revolving debt must be used wisely or you can quickly get in over your head. Making minimum payments on this type of debt pays the interest but little, if any, of the principal.

Line of credit

A line of credit is a loan for a specific amount that you can borrow against and repay on an ongoing basis.

• A line of credit may also be called an “authorized overdraft.”
• A line of credit may be secured or unsecured. A secured line of credit may have a higher credit limit because you have offered security to borrow the money.
• Interest rates are generally lower than those offered on credit cards.
• Interest rates may fluctuate with the prime lending rate.
• You pay interest on the money borrowed for the time you are using it.
• Money is usually accessed with a debit card or cheque.
• Minimum payments are usually required.

Home equity line of credit

A home equity line of credit (HELOC) allows you to use the equity in your home as security to receive a preferred lending rate. You can borrow against and repay on an ongoing basis.

• The equity in your home is calculated by subtracting your outstanding mortgage amount from the appraised value of your home.
• Interest rates are generally lower than those offered on credit cards.
• Interest rates may fluctuate with the prime lending rate.
• Your financial institution may require an appraisal.

Interested in renovating? Read our article on using your home equity for renovations.

Major credit cards

Credit cards come with a pre-set limit that you can borrow. There are a variety of card types that are generally accepted worldwide, such as MasterCard, Visa and American Express.

• Credit cards may offer you rewards through points or cash back and features such as travel protection. There may be an annual fee associated with these cards.
• Interest rates tend to be higher than consumer loans.
• A minimum payment is required each month, calculated as a percentage of the balance on the card.
• Most cards offer a grace period. If you pay the balance in full by the due date indicated on your monthly statement, you are not charged any interest.
• The grace period does not apply to cash advances (ATM withdrawals or credit card cheques). Interest starts accumulating right away. Service charges may also apply.
• If you do not pay the amount in full you will be charged interest on the either entire amount borrowed or the outstanding balance, depending on the card.
• Partial payments are usually applied by paying the interest first, then any service charges and fees, and then the principal amount borrowed.

Retail cards and accounts

Retailers offer credit cards and credit on account that is only good in their store. Examples include gas stations, department stores and clothing stores.

Be wary of opening these accounts just to get a discount on your purchase with the intent of closing the account later. This may save you $20 on your purchase but it can lower your credit score and cost you a lot more when you try to borrow in the future.

• Retail cards usually have higher interest rates than major credit cards.
• Some cards allow you to “buy now and pay later.” There may be administration fees associated with paying later. Be sure to ask about them.
• If you use a retail card to make a major purchase (furniture, appliances) and you don’t intend to keep the card, call the issuer and have the card cancelled. Cutting up the card does not remove it from your credit report.