Discover How to Establish a Line of Credit

Discover How to Establish a Line of Credit

Many people are familiar with the concept of a credit card. It is a plastic card that gives you access to money loaned from a bank, which can be paid back at a later date. A line of credit works in a similar way, but there are a few key differences. While credit cards can theoretically be used indefinitely, lines of credit have fixed amounts that you can borrow.

However, they can have unique advantages that may make them more attractive to certain consumers. Read on to learn more about lines of credit.

Why You Might Need to Establish a Line of Credit

A line of credit gives you more flexibility than a credit card or personal loan. You do not have to borrow the full amount that you allocated each month. Thus, you can choose the size of your payment, and it is often easier to get cash advances with a line of credit than with a credit card.

Who can get a line of credit?

Although anyone can apply for a line of credit, there are a few factors that will make your application more likely to be accepted. Mostly, you need to establish your credibility and trustworthiness to the lender. This can be done by having a good credit score, as your score shows that you are a responsible credit user who will pay back the funds in a timely manner. There are other factors depending on what kind of credit line you need, as discussed below.

Revolving vs. Non-Revolving Lines of Credit

There are many different types of credit lines, which have many different features. By examining the different types and comparing their features, you can make the right decision about what kind of credit you need. One of the major differences between a line of credit and a credit card is that certain types of credit lines can help in ways that credit cards cannot. However, some other types of credit lines have unique restrictions not seen with credit cards.

Revolving lines of credit are, in many ways, comparable to credit cards. This is because consumers can use them to pay for a variety of goods and services up to their maximum amount. By paying your credit bills regularly, your creditor will often increase the maximum amount that you are able to withdraw, which can also help your credit score. The reason these accounts are labeled as “revolving” is because they reset monthly or after each billing period. As long as you do not go over your limit during any one billing period, you may continue to use a revolving line of credit indefinitely.

A non-revolving line of credit, however, is slightly less versatile. They also allow you to access a certain maximum amount of borrowed funds, but they do not reset after each billing period. Therefore, a non-revolving line of credit is a temporary service. After you have withdrawn the maximum amount from the account and repaid the associated bills, the credit line is closed. Then, you can apply for another line of credit if necessary.

Whereas revolving credit lines can be compared to credit cards, non-revolving credit lines are more along the lines of student loans or auto loans. After the funds have been repaid with interest, you cannot use them again.

Secured vs. Unsecured Lines of Credit

The other major point of differentiation between credit lines is their level of security. An unsecured line of credit is perhaps the most popular type of credit line for personal use. This is because despite their name, they can actually be less risky for a consumer to use and are applicable to more circumstances. The reason that they are called “unsecured” is that they are more risky for the lender because when the borrower starts the line of credit and is able to draw money from it, she or he does not have to provide any collateral. Therefore, besides forfeiting continued use of the line of credit, they do not have anything to lose by failing to pay their monthly credit bills. Due to this risk, unsecured lines of credit can:

  • Be harder to obtain (thus, making it more likely to only be attainable by reputable businesses or individuals with very high credit scores).
  • Have higher monthly interest rates than other lines of credit in order to make up for the increased level of risk on the lender’s part.

As well as being an example of a revolving line of credit, credit cards are also considered unsecure lines of credit because they do not require any additional collateral in case you do not pay your monthly bills.

On the other hand, secured lines of credit are safer for lenders but less convenient for borrowers. A common example of a secure line of credit is a Home Equity Line of Credit (HELOC), which you might need if you want to make a big addition, repair or other unforeseen expense to your home. Using this type of credit line will allow you to borrow the requisite funds and pay them off over time via credit bills, much as you would for a credit card.

However, the reason that this type of credit line is “secured” is that borrowers are putting the equity, or appraised value of their home, on the line in order to borrow these funds. If borrowers fail to pay monthly bills for a HELOC, they are at risk of forfeiting their homes. Many of these lines of credit still have fixed terms, however. If a borrower is allowed 10 years to draw money from their HELOC, for example, it is expected that all balances must be paid by the end of that designated term.

How to Apply for a Line of Credit

It can be easy to find the right lender and line of credit option to fit your needs, assuming you fulfill the right eligibility requirements, including having a good credit score, responsible credit history, etc. You can find them as an available alternative to credit cards and other loans at nearly any bank or credit union. However, not all lines of credit are weighted the same. Depending on your specific needs and eligibility, one bank may offer you better interest rates and maximum allotments than another one. Therefore, it is recommended to consider all of your options carefully and go with the bank or lending institution that gives you the best rates and convenience.

By Admin