There are a lot of different credit products the bank offers and figuring out which one is for what can be confusing at times. Aside from credit cards and loans, the bank also has what’s called a Line of Credit. Yay! More
ways to spend your money, right? Well a line of credit can come in pretty handy when planni
ng for large purchases, preparing for emergency situations and unexpected expenses.
How Does A Personal Line of Credit Work?
A personal line of credit is a credit account, with a limit, which you can borrow against. The interest rate is usually much lower than a credit card and you only pay interest on the amount you actually borrow. For
example, if you have a $5000 limit and you withdraw $1000 to buy a new couch, you would only pay interest on the $1000 borrowed. You will receive a monthly statement, prompting you to repay this $1000 with either monthly payments or you can repay in full.
Personal Line of Credit vs. Credit Card
- Usually has a high interest rate
- Has lower credit limit
- Is meant for smaller purchases, click here for credit card payoff calculator
- Meant for short-term borrowing, should be paid off within 30 days
Line of Credit
- Low interest rate
- Interest rate satirists soon as money is borrowed
- Meant for long term financing
- Has higher credit limits, can be in the hundreds of thousands
Features of Personal Line of Credit
- Can be used to consolidate your existing credit card debt to save on interest payments
- Interest rate is usually much lower than any credit card and therefore allows you to save on payments and frees up significant monthly cash flow
- It’s best to use for larger purchases such as electronics or furniture because your credit card limit may not be enough (example: personal unsecured line of credit can be as high as $50,000 limit)
- It’s great to have for a rainy day, in case the unexpected happens, peace of mind
Is a Personal Line Of Credit A Good Idea?
This one really depends on what you are planning to use it on. I’ve witnessed people fall hard into debt for thousands of dollars simply by spending the credit on day to day insignificant purchases. It’s super important to keep the line of credit for long term investing such as education or bigger purchases such as furniture. It’s so easy to spend the money on silly things but not have the ability to pay it back, and it can be a scary spiral into debt and bankruptcy.
Get Approved For Personal Line Of Credit
To be approved for a personal line of credit you must have a good credit score. Additionally other factors come in to play such as your income and existing debt.