A revolving credit account is an account which provides the opportunity for borrowing, but like a current account may be operated with a credit balance. Most of the major banks provide revolving credit accounts in Nigeria. The following list outlines the usual features which they have.
Features of Revolving credit accounts
- The customer agrees to make regular monthly payments (usually over N20,000).
- A credit limit is agreed (normally 25 or 30 times the monthly payment).
- Interest is charged on any borrowing at agreed rate (and rate changes are usually announced in the press).
- Interest is paid on any credit balances (though at lower rates than the debit interest, and often below what is offered on deposit accounts).
- Insurance is usually offered to pay off the debt in the event of death, or to meet repayments if borrower is ill or made redundant.
Many banks require the holder of a revolving credit account to have a current account as well, but others, for example the co-operative bank, promote their account as a second account to attract customers whose main account is with another bank.
PROVIDERS OF REVOLVING CREDIT ACCOUNTS IN NIGERIA
ADVANTAGES OF REVOLVING CREDIT ACCOUNTS
Advantages for the bank
- Credit scoring can be applied when a customer applies for the account.
- Payments into the account can be automated.
- Monitoring the account is easy.
- Customers who bank with competitors may be attracted.
- Other services such as insurance can be sold.
- Interest rates can be adjusted to encourage either more saving or more borrowing.
Advantages for the customer
- Most services provided with a current account are available.
- Borrowing is very flexible.
- Interest is paid on credit balances.
DISADVANTAGES OF REVOLVING CREDIT ACCOUNTS
Disadvantages for the bank
- Opening the account is costly compared to loans because of the issue of cheque books and plastic cards
- The account is unlikely to attract high levels of deposits.
- Borrowing will be on a small scale too so interest earned will not be very high in total.
Disadvantages for the customer
- Borrowing may be quite expensive
- If the credit limit is fully used repayment may take a very long time.