Credit cards, home equity lines of credit, and revolving lines of credit are examples of revolving retail exposures, whereas mortgages, auto loans, and home equity loans are examples of term loans. There are many differences between revolving exposures and term loans for example, revolving exposures are open-ended, while the term loans are close-ended; borrowers pay interest only on funds drawn from the revolving credit; and a qualifying revolving exposure (QRE) is unsecured and unconditionally cancelable by the lender to the fullest extent permitted by federal law. In terms of repayment, the interest and principal payment of term loans are usually equal monthly installments over the life of the loan, whereas revolving credits allow the consumer to repay any amount at any time as long as the preestablished minimum monthly payment is met.

Revolving retail credit products offer convenience and financial flexibility that term loans lack. They can provide borrowers access to funds when deterioration in credit quality prevents them from borrowing through other credit channels. Agarwal, Ambrose, and Liu (2006) studied home equity line utilization at and after origination and found that borrowers with greater expectations of a decline in future credit quality originate credit lines to preserve financial flexibility. Furthermore, borrowers with higher FICO scores (a measure of credit risk) tend to have higher credit utilization at origination, consistent with the theoretical models predicting that borrowers with lower credit quality signals preserve flexibility by utilizing a lower amount of credit at origination relative to borrowers with higher credit quality signals. Agarwal and others (2006) also found that borrower credit line utilization increases in response to drops in borrower’s FICO scores, consistent with the theoretical “credit risk” prediction of Strahan (1999).