Credit Line: Your Ultimate Guide To Everything About Lines of Credit
If you’re a credit cardholder or a seasoned borrower, you may have heard of the term “credit line.” Get to know everything about credit line, the different types, how it works and whether it affects your credit score.
What Is Credit Line or Line of Credit (LOC)?
A Credit Line, also known as “Line of Credit (LOC)” is a preset borrowing limit you can use anytime. The holder can take money out as needed until the limit is reached. It can be borrowed again based on the usable amount of credit line.
A LOC is also an arrangement between a financial institution, usually a bank or a client, that establishes the maximum loan amount the customer can borrow. The borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement.
How do Credit Lines Work?
A credit line is different from a traditional loan. With loans, you can apply for a sum of money and pay it back in installments within that set time frame. However, you can't continually take out new money against the same loan.
With a line of credit, you are applying for regular access to cash whenever you need it. In addition, it's usually understood that you may take out money repeatedly throughout the life of your loan as long as it is within the limit.
Credit Lines vs. Credit Limits: What’s the Difference?
A credit line is a name for a type of loan or credit that allows you to borrow and repay money, usually on a revolving basis, such as in a credit card.
A credit limit, on the other hand, is a feature of a loan. The credit limit of a loan is the maximum amount you can borrow or use at a time before you must begin repaying.
Once you reach that limit, you must begin paying off your credit card balance before you can use it to spend more.
Types Credit Lines: A Guide for Borrowers
There are several types of credit lines available for every kind of borrower, all of which has different purposes. Here are the different types of credit lines we will be discussing in this article:
Unsecured Lines of Credit
Secured Lines of Credit
Personal Lines of Credit
Home Equity Lines of Credit
Business Lines of Credit
Unsecured Vs. Secured Lines of Credit
Unsecured lines of credit simply mean no collateral is needed for security. But because of the increased risk for the lender, interest rates are higher than they are with a secured line of credit.
A credit card is one of the most common versions of an unsecured line of credit. Your credit limit serving as the maximum amount you can borrow.
When it comes to credit cards, you don’t offer any collateral when you’re opening an account. If you start to skip on your payments, there are no specific items the card issuer can take from you.
A secured line of credit requires you to offer up some sort of collateral – like a house, lot or a car – to ensure the security of the loan. Worst case scenario, if you don’t repay your debt, the lender can seize whatever asset you offered.
Lenders would find this more appealing because they have a way of ensuring the security of paying just in case the borrower doesn’t pay it.
For borrowers, some credit companies offer lower interest rates and higher loan amounts compared to unsecured LOCs.
Personal Credit Lines and Loans for Borrowers
The reason why a personal line of credit exists is to give access to borrowers to unsecured funds and repay on a revolving basis. In general, there are certain qualifications you need to be approved for this type of credit line.
The credit company or lender has different criteria to consider where certain qualifications to consider. For example, if you’re looking to secure a personal LOC from a bank, you need a credit score of 680 or higher.
Home Equity Lines of Credit (HELOC)
For the home equity line of credit, your house is offered as collateral. The maximum borrowing limit is determined by the available equity in your house. It works similarly to other lines of credit in that you can borrow as much as you need up to your available limit.
Typically, you can avail on around 80 percent of what your home is valued at minus the balance owed on the mortgage. You can continue to borrow funds as long as you repay your outstanding debt on time.
When the draw period (typically lasts 10 years) is over, the balance is due and the repayment period starts. There are usually closing costs that come with a HELOC, like a cost of having your property appraised.
HELOCS are typically used for bigger expenses or to consolidate high-interest debt. They generally have lower interest rates than other types of lines of credit and can be tax-deductible.
You can only deduct the interest paid on a HELOC if the money is being used to purchase, build, or improve the home being used as collateral.
Business Lines of Credit
If you’re a business owner, this type of LOC is for you. Business line of credit is used by businesses to borrow money as they need it instead of taking out a separate, fixed loan.
The lender will review the business financials: profitability, the market value, and the risks taken. Lenders use this information to determine the specific loan detail and the amount of loan granted.
Can I Have Multiple Credit Lines?
Yes, you can have multiple lines of credit at once, and there’s even a good chance that you’re likely to have several. Common lines of credit are credit cards, mortgage, student loans and other types of loans.
The key is to make sure you can afford to pay for everything on time.
The Advantages of Multiple Credit Lines: More Personal Available Credit
Having multiple lines of credit can help build your credit score. When FICO is calculating your credit score, they consider the variety of loans you’re managing.
If you’re handling different types like credit cards and installment loans, FICO sees it as having more experience with borrowing. As long as you keep a low credit utilization rate, and practice healthy credit practices, having multiple lines of credit might help improve your credit score.
The Disadvantages of Multiple Credit Lines: Potential Damage to Personal Credit Scores
Having multiple lines of credit sure has advantages, but there certain disadvantages to this. Interest rates might get piled up on a bunch of different loans that will add to the monthly expenses.
Doing this could potentially make it harder for you to meet all of your payment obligations. Having multiple credit lines can also increase the chances that you forget to pay a bill, which could hurt your credit score. As mentioned, the key is to pay debts on time.
While multiple lines of credit can increase your credit score, there’s also a chance that you could be slightly damaging your credit. This happens when you take out multiple loans. This is because it shows FICO that you might be in financial trouble due to taking several lines of credit.
Credit Lines: In Summary
Lines of credit is a preset borrowing limit you can use anytime. The holder can take money out as needed until the limit is reached. It can be borrowed again based on the usable amount of credit line.
There are several types of credit lines unique to every customer and for every need. A borrower can have multiple lines of credit as long as a healthy paying practice is done.
Do you need help with lines of credit? Consult our credit repair professionals here at CreditPlanned for free today.