Background

• Revolving credit is a constant money line that you can use to make purchases. Credit cards, store cards and home equity lines of credit are types of revolving credit. You typically must make monthly payments for purchases made with revolving credit lines. These types of credit differ from installment loans -- such as mortgage, car and personal loans -- in which borrowers receive one lump sum of money and must repay the cash over long periods of time.
  
  

Effects

• Having a line of revolving credit is important to maintain a healthy credit report, according to the Fair Isaac Company, which developed the FICO scoring program that the consumer reporting bureaus use to determine individual credit ratings. If you have a diverse mix of credit types, including installment loans, automotive loans and lines of revolving credit, you will receive a higher FICO score than someone who doesn't use multiple credit types, Fair Isaac states.
  
  

Drawbacks

• Although having such accounts can help raise your FICO score, under certain conditions revolving lines of credit can be detrimental to your financial profile. If you fail to make payments on your home equity line of credit or credit card, your creditors will send your accounts to a collection agency and report them to the credit bureaus as "charged-off." This will cause your FICO rating to plummet. Additionally, the collection accounts themselves will also cause your credit rating to fall.
  
  

Considerations

• Keeping your revolving credit lines well below their limits is important to maintaining a favorable FICO score. This is because Fair Isaac's algorithm factors in a category known as "amounts owed," which measures your revolving credit lines' balances against their credit limits. To receive the best FICO score, you should keep your revolving debt at 30 percent or less of your card's or line of credit's spending limit. Carrying debt levels above 30 percent will negatively affect your credit score.