What is Revolving Credit? Cautions When Using It
Overview
This document explains the concept of revolving credit (partial payment deferment agreement) and summarizes the key points to watch out for when using it.
Introduction
A credit card is a type of financial card that allows the user to pay for goods or services at a later date, with the card issuer guaranteeing payment based on the user’s creditworthiness. Revolving credit is one payment option for credit cards, officially referred to as a Partial Payment Deferment Agreement. It allows you to pay only part of your credit card bill when payment is due and carry the remaining balance over to the next month.
However, while revolving credit has some advantages, it also carries significant risks. This document outlines its pros, cons, and the critical precautions you should take when using it.
Concept of Revolving Credit (Partial Payment Deferment Agreement)
Revolving credit allows you to pay only part of your current month’s credit card bill and roll over the remaining amount to the next month without being marked late. Unlike installment payments, which have a fixed repayment period, revolving credit does not have a set number of payments.
With revolving credit, you can pay between 10% and 100% of your statement balance, depending on the agreed payment ratio, and continue to use your card without interruption.
For example, if you owe ₩1,000,000 and your agreed payment ratio is 10%, you can pay ₩100,000 now and defer the remaining ₩900,000 to the next month.
Advantages of Revolving Credit
- Asset Management & Credit Score Protection: If your monthly income fluctuates, revolving credit lets you pay only what you can afford while avoiding late payments, which protects your credit score.
For example, if you can’t pay your full card bill this month, you can defer part of it to the next month. However, this should only be done if you are certain you can pay the deferred amount the following month—otherwise, you risk falling into a debt cycle. - Easier Access than Loans: Bank loans require an application process and approval, but revolving credit can be used immediately if you already have a credit card. Unlike loans, which may charge an early repayment penalty, revolving credit allows you to pay off the balance at any time without extra fees.
Cautions When Using Revolving Credit
While it has benefits, revolving credit can also be financially dangerous if misused.
High Interest Rates
As of October 2023, the average interest rate (or service fee rate) on deferred balances was around 15.65% to 17.88%—higher than many standard personal loans. This means your debt can grow rapidly if you carry a balance for long periods.
Impact on Credit Score
Simply using revolving credit does not directly lower your credit score. However, using it for extended periods or failing to pay interest can signal to credit bureaus that you are unable to manage debt, which can harm your credit score. In particular, missing a payment after using revolving credit can cause a severe drop in your credit rating.
How to Check and Cancel Revolving Credit
Here’s how you can check whether you are enrolled in revolving credit and how to cancel it:
- Check Enrollment Status
- Call your credit card issuer
- Check through the card issuer’s website or mobile app
- Look for the phrase “Partial Payment Deferment Agreement (Revolving)” on your credit card statement
- Cancel Enrollment
- Contact your card issuer or use their website/app, similar to checking your enrollment status
Re-enrollment after cancellation may be restricted depending on your credit status.
Conclusion
I first learned about revolving credit during a high school history class when the teacher happened to discuss personal finance. I decided to summarize it here because it’s important information. Revolving credit can be a useful option if you cannot pay your full credit card bill but need to keep using your card—but only if you are absolutely certain you can pay the deferred balance the following month.
Given the high interest rates, misuse could even lead to severe financial distress, including personal bankruptcy.
In summary, when using revolving credit:
- You must have a guaranteed plan to pay the deferred balance in full the following month.
- Set a high payment ratio so that even if interest accrues, the deferred balance remains manageable.