Getting a credit card is an exciting financial milestone that most people pass at some point in their lives.
When you’re approve for a card, you’re also given a line of credit you can use. This refers to the amount of funds you can borrow at any time.
To take advantage of your line of credit, you need to remain in good standing with your lending institution. Usually, this means you must pay your credit card bill on time and keep your overall credit utilization low.
Before you start using your new credit card, it’s important that you understand what your line of credit is. The following sections explain this and more.
What different lines of credit are available?
There are three main types of credit lines available. The three type of credit lines include:
- Revolving, such as a credit cards. This type of credit has a cap, but you can borrow from the line so long as you don’t go over your limit.
- Installment, which is a one-time fixed amount that has monthly payments such as a mortgage or other types of loans.
- Open, such as charge cards, which must be paid in full each month.
Different lines of credit are usually issued for specific purposes. Furthermore, the amount of funds you’re eligible to borrow is usually based on the type of credit line you have. For instance, a bank may issue you a credit card with a maximum limit of $20,000 but a home loan for $200,000.
Am I eligible to open a line of credit?
Even though most people are eligible to receive a line of credit, there are some details that can make an application more appealing to a lender. The most important factor is to establish credibility and trust with the lender.
In order to do this, the borrower must have a good credit score. A solid credit score provides a lender with proof that the borrower has been responsible with his or her credit in the past. Therefore, it’s important that you have a good credit score before you can obtain a line of credit.
Revolving vs. Non-Revolving Credit Lines
Various types of credit lines have unique features. These can be beneficial or restrictive, depending on your need. When exploring the different types of lines of credit, it is important to weigh which one is right for you. Because of the unique features to a line of credit, each method of credit can help in different ways.
Eligibility for revolving or non-revolving lines of credit will depending on the lender. For instance, you may only be able to obtain a line of credit for those with bad credit specifically if your have a poor financial history. You can learn more about these different types of credit here.
Revolving Lines of Credit
Credit cards are one of the most popular versions of revolving lines of credit that you can get. These are known as “revolving” accounts because the account resets to its original limit every month or after each billing period. The borrower may continue to use a revolving line of credit indefinitely so long as the borrower does not surpass the limit during any one billing period.
The creditor will increase the maximum the borrower is allowed to withdraw with time as he or she proves to be reliable to pay back the full amount. The increased maximum can also help improve the credit score of the borrower.
Non-Revolving Lines of Credit
While revolving lines of credit are comparable to credit cards, non-revolving lines of credit are comparable to student loans or even auto loans. Once the borrower has paid back all the funds with interest, the line of credit cannot be used again.
This credit line is somewhat less flexible than the revolving line of credit. This is because it does not reset to its original limit at the end of a billing period. This inability to reset its amount means a non-revolving credit line is a temporary service.
Once the maximum account has been withdrawn and all the credit bills have been paid back, then the line of credit will close. If necessary, then it is possible to apply for another credit line.
What are secured and unsecured lines of credit?
Another factor that separates certain lines of credit is their level of security for the lender.
Unsecured Credit Lines
An unsecured credit line is a popular option. This is especially true if you’re looking for a credit line you can use for personal use. Credits cards are considered unsecured lines of credit as well because they do not need additional collateral.
The reason this is called an “unsecured” credit line is because the party that is taking more risk is the lender. When the borrower opens his or her line of credit and is able to access their money, he or she does not have to provide collateral to the lender. Accordingly, the borrower does not lose anything when he or she fails to pay back their monthly credit bills with an unsecured credit line.
Because of this increased risk for lenders, unsecured lines of credit can be more difficult to obtain and have higher monthly interest rates than other types of credit lines. This increased interest rate is to make up for the increased level of risk on the part of the lender. The difficulty of obtaining this also makes it more likely that only reputable businesses or individuals with high credit scores can have access to this line of credit.
Secure Credit Lines
On the contrary, secured lines of credit are more secure for lenders. In these situations, the borrower needs to place something, usually property, as collateral to obtain a loan. In the event the borrower fails to repay the loan, the lender has rights to the collateral.
Home Equity Line of Credit (HELOC) is an example of a secure line of credit. You can use it if you need an addition to your home, a repair or any other unexpected expense for your home. Just like any line of credit, you may take out funds and pay them back every month until all the borrowed amount has been repaid.
HELOC is known as a secured account because borrowers are putting the appraised value of the home as collateral. Failing to pay monthly bills for HELOC means that borrowers are risking forfeiting their homes.
Common HELOC Loans