Originally Posted On: https://www.iquanti.com/
Whether you need money that you’d have right now, expect to make a major purchase, or just prefer not to use cash, a line of credit can be a convenient option. Let’s dive deeper into how a line of credit works and how it can be used to your benefit.
What is a line of credit?
A line of credit is a predetermined fund of money that you can borrow against as needed. Once the lender approves you for this loan, you can draw from this fund up to some preset limit. As you pay down the balance, the process can be repeated for as long as the loan is active.
A line of credit can be secured or unsecured. Here are a few examples:
- Personal lines of credit: Personal lines of credit are flexible, unsecured loans that let you access funds as needed. You can pay back the money you owe all at once or over time. Borrowers can easily find a personal line of credit online by looking for reputable lenders on a laptop or mobile device.
- Credit cards: Credit cards are a classic example of an unsecured line of credit. The credit card issuer will give you a physical card that you can use at any merchant of your choosing. You must then pay this balance back, or it will become part of your revolving balance and incur interest.
- HELOCs: A HELOC or “home equity line of credit” is an example of a secured line of credit. They work similarly to a credit card, but your home will be considered collateral – something the lender can take if you can’t repay the loan.
How to make the most of your line of credit
If you’re considering getting a line of credit, here’s how to leverage it to your advantage:
1. Use it responsibly
Just because the lender may offer you a credit line for tens of thousands of dollars, this doesn’t necessarily mean that you should use all of the funding that’s available to you. The amount of money you use divided by your total available credit is a metric called your credit utilization ratio. Especially when it comes to credit cards, it’s recommended that your credit utilization ratio should never exceed 30 percent. Otherwise, it could have a negative impact on your credit score.
2. Always make your payments on time
Anytime you borrow money from a lender, you’ll want to demonstrate good financial maturity by ensuring you make your payments on time and pay at least the minimum required amount. It may be smart to set your credit card or loan for automatic payments. This allows all payments to be made automatically, so you don’t have to remember to pay manually each month.
3. Avoid interest charges
Racking up unnecessary interest may make it harder for you to repay the money you borrowed. So, it may be wise to use your line of credit sparingly and pay off the debt in full as soon as possible.
4. Raise your credit limit
Whether you need the limit on your line of credit to be higher or not, it’s generally a good idea to increase it over time. The more credit you have available to you, the lower your credit utilization ratio will be. This will have a positive impact on your credit score.
The bottom line
A line of credit is a flexible loan, such as a HELOC or personal line of credit, where a lender gives you access to a predetermined amount of money. Although lines of credit can be convenient, they should be used responsibly so that you don’t incur interest or negatively impact your credit score.
