A line of credit is a form of revolving credit similar to a credit card issued by a bank or other lending institution. The line of credit can be offered as an unsecured loan, or secured by an asset, such as your house. The secured line of credit will typically have a lower interest rate and a higher credit limit because they are considered lower risk for the lender.
Lines of credit will require you to pay a minimum monthly payment based on the balance that you have used. Sometimes you are only required to pay enough to cover the interest. As with any form of revolving credit, if you just pay the interest due or the minimum payment, the balance will not move.
Lines of credit can come in handy in the event you need money for an emergency, such as a broken-down furnace or car. If you don’t have an emergency savings fund to pay for these unexpected expenses, then a line of credit can be better than a credit card due to the lower interest rate.
Only you can decide whether you should take out a line of credit, but the best rule of thumb is to only use credit when you absolutely need it. If you’re using it to simply by something that you want and don’t need, then you should instead try to save the money and buy it outright instead of paying for it with credit.
If you find yourself using your line of credit to pay for everyday purchases such as groceries and gas, it will take no time to reach your maximum credit limit, and you’ll be in big trouble.
Here are a few things to keep in mind when it comes to lines of credit.
- A line of credit is not disposable income.
- If you carry a balance, make more than the minimum payment due each month. Otherwise, you’ll never pay it off.
- If you frequently use your line of credit because your cash flow is tied up making other bill payments, it may be time to look at your current financial situation.
- If you treat your line of credit as if it were a loan, you can be very successful in paying it off. The most important thing to remember is to find a payment plan that suits your budget and will get the debt paid in a reasonable amount of time.
- Be Cautious. There is a new line of credit product being offered at payday loan establishments. This product is often promoted as a way to help people rebuild their credit rating. These specific lines of credit have very high fees and interest rates associated with them. Yes, they do report to the credit reporting agencies, but rebuilding your credit rating this way may come at a very high price.
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