One great feature of a good bank is a line of credit. Banks offer loans or lines of credit. A line of credit allows you access to a set amount of money that you are able to borrow from as you need. A line of credit is similar to a credit card, but it offers a higher borrowing limit. It’s important to establish a good credit score to qualify for a line of credit.
A line of credit offers similar flexibility to credit cards. The borrower can borrow any amount that doesn’t exceed the credit limit. The borrower isn’t obligated to spend the full amount, but can borrow whatever funds they need. You won’t pay interest on your line of credit until you borrow from it. Once you borrow from your line of credit, you’ll pay interest on the amount you borrowed. The borrower can pay back the amount plus interest in monthly payments or pay the full amount in one payment. This is considered an open-end credit account. Closed-end credit, like loans, is where an individual borrows a set amount and repays that amount plus interest in fixed monthly payments. The interest on a closed-end credit starts immediately.
With the exception of Home Equity Line of Credit (HELOC), lines of credit are unsecured loans. This means the borrower doesn’t need to provide collateral. In a Home Equity Line of Credit, the collateral is the borrower’s home.
A line of credit has a higher limit than credit cards. While a credit card can be used for everyday purchases and groceries, a line of credit is used for more expensive purchases or business investments. If you have a home improvement project coming up, you might want to look into setting up a line of credit. Another difference between credit cards and lines of credit is that a line of credit has a draw period. The funds from a line of credit are only available for a predetermined amount of time. After the draw period, you’ll enter the repayment period where you will need to pay back the amount borrowed. Credit cards don’t have a draw period or repayment period.
It’s important to develop good credit to qualify for a line of credit. Because a line of credit is an unsecured loan and allows you to borrow a high amount, you need to have a high credit score.
A higher credit score could also allow you to have lower interest rates on your line of credit.
One important thing to note is that late payments on your line of credit will hurt your credit score.