What is really a line of credit and how can it work?

What is really a line of credit and how can it work?

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In an ideal world, a personal line of credit is a bank (or credit union) loan that hangs out in the background of your larger financial plan, waiting for action when unexpected or special expenses arise that your financial allowance isn't willing to cover.
In many ways, an individual line of credit resembles a bank card:

There exists a specific amount you can borrow against (much just like the limit on most credit cards)
You could use it for almost any purpose
You could pull the trigger as it's needed
And in most cases, as you spend off the total amount, you free up the loan amount to borrow against again. (This is the classic definition of “revolving credit.”)

Your own line of credit is definitely an unsecured loan. That is, you're asking the lender to trust you to produce repayment. To land one, then, you'll need to present a credit score in the upper-good range — 700 or maybe more — accompanied by a history of being punctual about paying debts.

Oftentimes, personal lines of credit fund home remodeling projects, but, to reiterate, the lender isn't interested in how you want to use the money, only that you're a fantastic risk to pay it back.

So, got your eye on that once-a-decade cruise? That tired family area needs fresh furniture? Squeezed by medical bills? The children need help investing in college? You're investing in a wedding? Your income is irregular — you freelance, work seasonably, or juggle contract jobs — your bills are steady?

These and countless other situations are prime candidates for private lines of credit. You borrow against your limit in sums as small or large as you need. And you pay interest (usually an important amount of points below any standard-issue credit card) only on the outstanding balance, not the general loan limit.

Sound good? Eyes spacious, please. Like any kind of debt, personal lines of credit carry risks; mismanagement can cause financial and personal heartache.

For instance, pawn brokers and payday lenders sort of fall into the universe of personal lines of credit — they don't really care how you may spend your loan, only that you pay it back, and they're happy to have your repeated business — but their fees and interest rates can be staggering. Safer to stick with reputable financial institutions.

Also, don't borrow against your loan just because you can. Focus on your budget; if your income is steady and reliable, beware the temptation to tap your credit line to pay monthly bills.

In addition you can apply for a secured line of credit by putting up something of value — jewelry, stock portfolio, gold, your property — and probably finish up having an even-lower interest rate. The danger? Mismanaging the line of credit risks the increasing loss of your property.

Additionally you might consider applying for a credit card with a zero-interest introductory rate — but only when you have a good strategy to pay for it off in the teaser period.

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