How to use revolving credit

Housing Market Written by John Bolton, Aug 2 2009

At Squirrel we give away all of our advice for free. Either we are stupid or we think you'll appreciate it and still work with us anyway. Revolving credit is one of those gems that advisers like us pull out to look intelligent. It’s not for everyone, but to my mind revolving credit rocks! We are setting up a lot of revolving credit accounts for clients at the moment. They are versatile and (done the right way) can help you pay your mortgage off faster.  You can easily drop the term of your mortgage by 5 to 10 years and (if you have a mortgage over $300,000) save up to $80,000 in interest. This isn't the only way to slash your mortgage, but it does work well.

What is revolving credit?

With revolving credit you can put part of your mortgage into your transaction account. It will feel like living with a big overdraft but at mortgage interest rates. Any extra money in your transaction account effectively lowers the mortgage balance and therefore you pay less interest.If you manage your mortgage and day-to-day transactions all in one account the risk is that it becomes a puddle, muddle, fuddle. You're never quite sure if you're getting ahead and it is far too easy to spend money! This is usually the reason why people stay away from revolving credit.

Two transaction accounts

The easy answer to managing a revolving credit account successfully is to have two transaction accounts, especially since most banks now have free or low-cost electronic transaction accounts. We recommend having your salary or wages paid into the revolving credit account. Your regular bills and the mortgage will be paid out of the revolving credit account. But for day-to-day expenses set up a regular automatic payment to a second transaction account and use that one. The simplest budget in the world is to manage your spending by limiting it to whatever is in the account, so this approach works a treat. If you need extra money, you can access it from your revolving credit, but it then becomes a conscious decision. An alternative is to use your credit card as the day-to-day account and pay it off in full from the revolving credit each month. You benefit from the 55 days’ interest-free and any reward points, if you're into that.

How high should I set my revolving credit?

When we set these up we first figure out how much of your mortgage you can conceivably pay off in one to two years. That forms the basis of how large we make your revolving credit.With the rest of the mortgage we tend to set it to a 25-year term and focus any extra repayment onto the revolving portion.  When your fixed rate matures we can then reduce the fixed-rate mortgage by moving some of it across to the revolving credit account, and starting over again! The benefit of this approach is flexibility. It means you can pay off your mortgage quickly, but if your circumstances change you can radically slow down your repayments. This is an excellent tool if you're starting a family and dropping to a single income.

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