Ravi Chandran
The greatest advantage of revolving credit is that it’s available when you need it. You don’t need to apply for a loan every time you don’t have enough cash to buy something. You can also use as much or as little credit from your revolving credit line as you want. With a credit card, you can buy a bar of chocolates as easily as you can purchase a laptop.
By: Hitesh Khan/
Revolving credit can also be used for any type of purchase.
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Mortgages, for example, are only good for buying a home, and car loans can only be applied to motorcars. But even though a home equity line of credit is based on the equity in your home, it can be used for virtually any purchase. Most people use home equity lines of credit to finance home improvement projects, but you could also use the cash as a low-interest loan to fund your next vacation or to pay off higher-interest debt from a credit card.
Revolving credit offers one financial solution to people who have steady jobs but irregular salaries. Perhaps you’re a successful salesman, but some months are slower than others. With revolving credit, you can buy things on credit now and pay for them when you have the money on hand after a few big sales.
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One of the greatest advantages of credit cards – the most popular form of revolving credit – is that they are safer to carry around than cash and they’re accepted just about everywhere. Imagine if you had to keep enough cash on hand to pay for gas, groceries, movie tickets, parking and all your other incidental purchases.
But the convenience of revolving credit doesn’t always outweigh its disadvantages. The greatest disadvantage of revolving credit is the temptation to spend money you don’t have. For some consumers, a $5,000 credit limit is simply too hard to resist. They buy now without any thought as to how they’ll pay later. And when they max out one credit line, they simply apply for another and start all over again.
Sometimes revolving credit can be a little too flexible. Without fixed payments, many people wait too long to pay off their balances. Compound interest adds up fast, especially with revolving balances totaling thousands of dollars.
Another danger of revolving credit (and this applies mostly to credit cards) is that the terms of the loan aren’t fixed. If you read the fine print of your credit card agreement, you’ll see that the lender can change your credit limit and interest rate any time. The lender is bound only to notify you in writing of the change.
Your credit score may affect your credit limit and interest rate. If your credit score changes due to defaulted payments to other lenders, you become a risky borrower. The annual effective interest rate in Singapore usually ranges from 24% to 28%. Some banks may even charge higher interest on your purchases. Your interest usually changes to correspond to your risk level, that is, when and how quickly you can be counted on to pay the lender back.
If you understand the risks and benefits of your revolving credit account, you can certainly use it to your advantage, especially if you are a small business owner.
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Also, there are many loans in the market for small business owners and not all products may be the best fit for your business. What’s worse is, taking an unsuitable loan could be a huge setback to you personally, as well as to your business. So, an important factor is, work with your lender to determine the type of loan that fits your needs.
Businesses need to borrow money not when their business is in the pink of health, but when their endeavor is successful. By the time you go to the red and remain in the red for a relatively long time, many lenders may not want to lend you money.
One recent research report said that up to 81 per cent of SMEs in Singapore do not qualify for business financing. Many applications for bank loans are delayed or rejected because business owners are not familiar with the qualifications for the loans or of how to apply for such loans. So, business owners who are in the red and are having difficulty in borrowing money to grow their business, should not discount the legal moneylenders.
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