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What Is a Line of Credit?

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What Is an Line of Credit?

A line of credit works as a credit card does: You use only as much as you need and you pay only interest on what you use.

Updated on January 7, 2022

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The term “line of credit” refers to an loan that you can use as credit cards. You are able to borrow a specific amount of money and only use the amount you require and pay interest only on the amount you spend. It’s different from an one that you pay back completely with interest over a fixed period of time.

How does a line credit function?

For personal credit lines, a lender preapproves you for a certain amount. You can use the funds for as long a time as you need them and pay the interest only on the amount you use, rather than the full amount.

The requirements for credit lines differ based on the type and lender, however borrowers with good or excellent credit (690 or higher on the FICO scale) have better chances of getting approved at the lowest rates that are available. Personal credit lines tend to offer lower rates of interest than credit cards, but they are flexible, meaning that they could fluctuate.

Customers of banks can have an open credit line to cover unexpected expenses or for overdraft protection on their account with a checking institution.

Most credit lines have two phases:

Draw period: Once approved for a line of credit and you’re now in the draw period and are able to make use of the funds as frequently as you want. In this period you’re accountable for the minimum monthly or interest-only installments, depending on the lender. Certain lenders provide credit lines with perpetual draw periods which they can let open.

Repayment period: Once a predetermined amount of time, your credit line goes into repayment and you cannot access the money.

Unsecured against. secured lines of credit

Lines of credit that are not secured Personal credit lines typically are unsecured. That means the lender uses only information about you including your credit, income and outstanding debts for example — to decide if you qualify for a credit line. This information can also affect the amount and annual percentage rate you are offered.

Secured lines of credit A line of credit with collateral can aid in obtaining an interest rate that is lower. A is an example of a secured credit line, in which your home is used as the collateral for borrowing funds. Smaller businesses could use inventory or property as collateral for a secured . The lender could take your property if you are unable to pay.

Compare personal lines of credit, credit cards and personal loans

Personal credit lines

Credit cards

Personal loans

Approximate APR range

7%-20%.

11.99%-24.99%.

5.99%-35.99%.

Amount of loan

Lender decides your credit limit.

Lender decides your credit limit.

$1,000-$100,000.

How do you borrow

As required.

As required.

Lump sum.

Repayment conditions

Varies by lender.

Continuous.

1 to 7 years.

Monthly payment

Variable.

Variable.

Fixed.

Annual fees

Some.

Some.

No.

Credit types

Revolving.

Revolving.

Installment.

Credit lines for personal use

Personal lines of credit are most commonly offered by credit unions and smaller banks, although there are some banks that offer them. Credit lines may have rates that range from 7 to 20% and can vary greatly. A credit line may also come with an annual cost that you are required to pay regardless of whether you make use of the funds available.

A majority of lenders provide an online application. However, small financial institutions may require the help of a telephone call to start.

They work best when: A line of credit allows you to have money available for unexpected expenses. They also work well in ongoing projects that have time frames and costs that are variable, like home or business remodeling.

Credit cards

Credit cards are usually issued by credit unions or banks. The typical APR for credit cards ranges between 11.99% to 24.99 percent. You can usually apply for credit cards on the internet and receive the card in seven up to 10 days following the approval.

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The best time to use them is They are designed for use in everyday life. They can be used for gas or food items or purchase furniture or pay for a car repair. It’s a best practice to keep your at or below 30%, so credit cards shouldn’t be used for spending that is higher than the limit.

Personal loans

Personal loans are available from a bank, credit union, or an online lender. These loans are most often unsecured and have rates between 5.99 percent to 35.99 percent.

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It is common to apply for a personal loan online to preview the prices as well as loan amounts. Many lenders make approval decisions within a couple of days and send your funds in one lump sum within just a few days after approval. Repayments toward your loan generally begin in the following month.

When they work best The personal loan is a great option for large, one-time expenses like a roof repair or to .

See if you pre-qualify for a personal loan – without affecting your credit score

Just answer a few questions to get customized rate estimates from several lenders.

What happens when a line of credit impacts your credit score

The process of applying for a personal credit line could result in your credit score taking a drop. It is typically a temporary drop of a few points.

Beyond that, the rest of the reliance is mostly on repayments. Regular payments to revolving credit lines can build your credit, but late payments could hurt your score, so borrow only with plans to repay it.

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Closing the account may cause a rise in your credit utilization , which can negatively affect your credit score. If you plan to replace the credit line, you must be cautious about it. For example, if you’ve applied for credit recently put off a few months as a lot of consecutive credit applications may lower your scores.

About the author: Annie Millerbernd is an individual loans writer. Her writing has been featured in The Associated Press and USA Today.

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