Learn About Lines of Credit – How They Work and How They Affect Your Credit Scores
A line of credit is a financing similar to a loan and a credit card. A line of credit, like a credit card, allows you to borrow money repeatedly – up to a limit. However, like a loan, the interest rates on a line of credit may be lower than those on a credit card.
A line of credit could be helpful if you need to finance a large project but need to figure out how much money you’ll need. Learn more about this financing, as well as some of its benefits and drawbacks, in the sections below.
What Exactly Is a Line of Credit?
A line of credit is a revolving credit similar to a credit card. The bank or credit union assigns you a credit limit after you are accepted for a line of credit. You can borrow up to that amount and pay interest solely on the amounts you use.
You must make a minimum monthly payment, just like with a credit card. As you repay the borrowed money, your lender will allow you to access cash up to your limit again. You should be able to borrow and refund monies as long as the account is open and in good standing.
In contrast, when you take out a loan, you receive the monies simultaneously. On the bright side, your interest rates and payments are usually fixed for the duration of your loan. This can make budgeting more accessible and the cost of financing more predictable.
Your account balance with a line of credit can fluctuate dramatically depending on how much you take from it. Most credit lines have variable interest rates as well. These two things can cause your payments to fluctuate from month to month.
Types of Credit Lines
Just like credit cards, lines of credit come in several different shapes and sizes. Understanding how different credit lines function might help you choose the right one for your needs.
Personal line of credit
A personal line of credit can be used to pay for a wide range of personal expenses. A personal line of credit can provide a lot of borrowing options for everything from home improvement projects to debt consolidation to unanticipated emergencies.
When you apply for a personal line of credit, the lender will look into your personal credit scores, credit reports, income, and debts. Suppose you meet the lender’s qualification requirements. In that case, your application will be approved, and the account will generally appear on your personal credit reports — Equifax®, TransUnion®, and ExperianTM — within a few months or less.
Personal lines of credit are classified as secured or unsecured. With secured lines of credit, you pledge collateral to the bank (sometimes in exchange for a lower rate or loan approval if your application is borderline).
