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Revolving Credit Explained

A well managed revolving credit facility can reduce your interest costs substantially.

Follow these tips to get the best out of your revolving credit mortgage and reduce the interest paid on your home loan. 

Revolving credit facilities are offered by most banks and can be a very useful product to reduce the amount of interest you pay over the life of your loan.  They need to be well understood and set-up properly to perform to their best. 

This is easily achieved when;

  • revolving credit is suited to your circumstances, and
  • the account is set-up properly at the start. 


First, let us explain how revolving credit works, and whom it is best suited to.


Characteristics of revolving credit loans

Revolving credit is a flexible, floating interest rate loan that is similar to an overdraft.  There are many different product names and different features within the revolving credit product set, but the following are a list of characteristics which are common to most revolving credit facilities. 

  • Revolving credit is a transactional account.
  • The borrower may use or withdraw funds up to a pre-approved credit limit.
  • The amount of available credit decreases and increases as funds are borrowed and then repaid.
  • The credit may be used repeatedly.
  • The borrower makes payments based only their loan limit and pays interest only on the amount they've actually used or withdrawn.
  • The borrower may repay the loan over time (subject to any minimum payment requirement), or in full at any time.
  • Some revolving credit loans charge fees, and some do not.
  • Some revolving credit products have reducing limits which amortise (reduce) like a table loan


Principles that make revolving credit work for you

The over-riding principle is that you must earn, or be likely to receive, more than you spend, leaving you a monthly surplus.  Assuming this is the case, then;

  • your monthly surplus becomes a repayment of loan principal, and
  • this reduces the principal owing on your mortgage and the interest you are charged each month. 


Revolving credit could be beneficial if any of the following applies

Some examples

  • Those who like the ability to overpay their mortgage when they can afford to, with the aim of repaying it sooner.
  • Those who can afford to overpay their mortgage now but may want to withdraw their overpayment in future.
  • Salary or wage earners who also earn bonus or commission income.
  • Self employed with irregular income and expenses. 


Managing revolving credit effectively

Follow these simple steps for the easiest and most effective way to manage revolving credit.  It is well worth spending a little time setting things up so you get the full benefit. 

  1. Income must be paid to revolving credit account

    1. Ensure your earnings are paid directly to your revolving credit account. 

  2. Set up direct debitsThis is a critical aspect of managing the account effectively. 

    1. Direct debt other loan payments from the revolving credit account.

    2. Direct debit your credit card repayments so that the card is repaid in full each month.  Your card must be repaid in full, on its due date, every month otherwise the system fails.

  3. Use your credit card. This is also a critical aspect of managing your revolving credit effectively.

    1. Direct debit your utilities (phone, power, gas, television, internet etc etc) from your credit card.

    2. Use your credit card for most, if not all, your purchases each month.  There are no transaction fees and most credit cards offer rewards based on spending.

  4. Minimize your use of EFTPOS and cash.  This is not as critical as the other set-up items above.

    1. Money you withdraw from your revolving credit account will incur interest.

    2. Your credit card will not charge you interest if it is repaid in terms of the set-up described. 


Set and forget is the simplest approach

With your account well organized at the start, and direct debits set up so you never miss a payment or get charged interest, you can relax and let the system work for you.  It will save you money by using your income to minimize the interest charged on your mortgage.