Credit Analysis: Revolving Credit/Utilization

Revolving Credit is the credit that is used, paid down and available to use again.  Think of a credit card with a $5000 limit and a $1000 outstanding balance.  if you pay $500 of the $1000 that you owe, then you have $4500 in credit available instead of the $4000 where you started.  That $500 you paid is revolving as it is now available to use again.  This is Revolving Credit.

Why is it important?

Since a portion of Revolving Credit is paid down every single month, one of the first things that happens when people start to get in trouble financially is they start to let their balances run up. They do things like pay the minimum each month or the minimum plus a tiny amount. Then balances start to creep up.  Leverage is a term you might be familiar with from business as its a description of how much borrowing a business does to help them with their operations. Well here, we are talking about personal leverage.  Is our borrower that we are investing in  funding their life with revolving credit? Are they living beyond their means?  The first way we find out is through their use of Revolving Credit.

On both Prosper.com and Lending Club.com , they refer to this figure as Bankcard Utilization or Revolving Utilization or in the case of this Prosper loan below, simply Revolving Credit balance and Bankcard Utilization. Here their balance is $104,125 and their utilization is 92%.

Prosper loan listing
Prosper loan listing

This means they are using 92% of their available Revolving Credit. This is very high personal leverage. There were other things I liked about this deal but there's no question that this is enough to scare alot of people away and for good reason.  Lower is always better in this case but we know if they are managing their credit responsibly by also looking at the credit score, which in this case is a very solid 740-759.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

2 thoughts on “Credit Analysis: Revolving Credit/Utilization

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