How Does Revolving Credit Work?

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Revolving Credit – the great promise to save people a fortune on their home loan.

It can work.

It just doesn’t for a lot of people.

How does it work?

  • Let’s take a $450,000 Home Loan – a common way to do it might be $50k Revolving Credit and $400k fixed for 2 years.

The Revolving Credit is a floating interest rate, but you can hold the cash you have against it which lowers the amount of interest you pay.

What happens is that

  • You get paid, which lowers the balance, which means you are only paying interest on the balance.
  • Spend everything on your credit card, which means your pay stays against your revolving credit for longer.
  • Desired result is:
  • Pay off credit card it full so this isn’t accumulating
  • Loan comes down quickly as you pay less interest.

Sounds beautifully simple right?

What do I often see in reality?

  • Pay goes in
  • Credit card spending is too high
  • Repay the card, get close to the revolving credit limit
  • Repeat
  • Get frustrated and get a fixed loan.
  • They are still paying less interest on the loan, but not making the inroads they thought they would.

I’ve seen plenty of people for who this system does work – typically they have great discipline with money. They generally aren’t natural spenders!