Many people are familiar with the idea of a credit card: a plastic card used to retrieve money a bank loans out and pay back later.
A line of credit is like a credit card; however, it has some fundamental differences between them. One example of this is credit cards could be used indefinitely in theory. Lines of credit have a fixed amount that can be borrowed. Despite this, taking lines of credit have unique advantages, making them attractive to those who would like a limit on their spending. Read further to find out more details on lines of credit.
Reasons Why You Might Create a Line of Credit
Because a line of credit allows you to borrow a fixed amount of money, it provides much more flexibility than a credit card or a personal loan. Choosing a line of credit gives the freedom to choose the amount you want to borrow. This method of credit also makes it easier to get cash advances.
Eligibility for Receiving 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 since it provides the lender with proof that the borrower has been responsible with his or her credit in the past. Paying back the loans in a timely manner is important to lenders, so observing credit score should be a priority.
Below are more details on credit lines depending on what kind of line of credit you need.
What are revolving and non-revolving credit lines?
There are various types of credit lines all with their own unique features. When exploring the different types of lines of credit and their respective features, you will find the credit line that is right for you. Because of the unique features to a line of credit, this method of credit can help in ways that credit cards cannot. Lines of credit also occasionally have restrictions that are not typical to credit cards.
One type of credit line is a revolving line of credit. This type is very similar to credit cards because consumers can pay for many goods or services up until the borrower has reached the maximum amount. When the borrower pays their credit bills in a timely manner, then the creditor will increase the maximum the borrower is allowed to withdraw. The increased maximum can also help improve the credit score of the borrower. 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 following line of credit is known as non-revolving. This credit line is somewhat less flexible than the revolving line of credit 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, it is possible to apply for another credit line.
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.
What are secured and unsecured lines of credit?
Another factor that separates certain lines of credit is their level of security. A line of credit that is very popular for personal use is an unsecured credit line. Even though their name may suggest otherwise, an unsecured line of credit can be more secure for a consumer to use and can be used in varying circumstances. The reason this is called “unsecured” is because the party that is taking more risk is the lender. When the borrower begins 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. With an unsecured credit line, the borrower will discontinue their use of it but the borrower does not lose anything when he or she fails to pay back their monthly credit bills.
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.
Credits cards are considered unsecured lines of credit as well because they do not need additional collateral.
On the contrary, secured lines of credit are more secure for lenders but are not as convenient for borrowers. Home Equity Line of Credit (HELOC) is an example of a secure line of credit that is used 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 needed funds and pay them back every month until all the borrowed amount has been repaid.
The reason HELOC is known as a secured account, however, is 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.
Applying for a Line of Credit
Fulfilling the eligibility requirements can ease the search for finding the right lender for you. The requirements include but are not limited to having a good credit score and a responsible credit history. Credit lines can be found at bank or credit union as an alternative for credit cards. Because every line of credit, its requirements and maximum amounts can vary, you should look carefully to find what option best aligns with your needs.