What is an Line of Credit?

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What is a Line of Credit?
A credit line works like a credit card: You only use the amount you require and you pay only interest for the amount you spend.


Last updated on Jan 7, 2022

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An unsecured line of credit a loan you use like credit card. You borrow a set amount and only use the amount you need and pay interest only on the amount you use. It's distinct from an repayment that is made fully with interest for a set time.
How does a line of credit function?
For personal lines of credit A lender approves you for a certain amount. You use the funds over time as you need them, and you pay interest only on the amount you use instead of the entire amount.
The requirements for credit lines vary by the type and lender, however people with good or excellent credit (690 or higher on the FICO scale) are more likely to getting approved at the lowest rates offered. Personal lines of credit tend to have lower rates of interest than credit cards, but they are flexible, meaning that they could fluctuate.
Bank customers may hold an open credit line to cover unexpected expenses or for an overdraft insurance to protect their bank account.
Most lines of credit have two phases:
Draw period: When you've been approved for a line of credit then you're in the draw period and are able to make use of the funds as frequently as you want. During this time you're required to make regular monthly minimum payments or interest-only installments, depending on your lender. Some lenders offer credit lines that have ongoing draw periods that you can leave open.
Repayment period: Once an amount of time, the credit line becomes repaid and you are unable to access the money.
Unsecured in comparison to. secure lines of credit
Lines of credit that are not secured Personal credit lines typically are unsecured. This means that the lender relies on only information about you including your credit, income and outstanding debts, as an instance -- to determine if you qualify for a line of credit. This information could also impact the amount of credit and the annual percentage rate you get.
Secured lines of credit: Securing a line of credit with collateral can aid in obtaining an interest rate that is lower. A is an example of secured credit line in which your home is used as the collateral for borrowing funds. Smaller businesses could make use of inventory or real estate as collateral for a secured . The lender could take your property if you fail to repay.
Compare personal lines of credit such as credit cards, personal loans
Personal credit lines



Credit cards



Personal loans



Approximate APR range


7%-20%.


11.99%-24.99%.


5.99%-35.99%.


The amount of borrowing


Lender decides your credit limit.


Lender decides your credit limit.


$1,000-$100,000.


How do you borrow


As needed.


As needed.


Lump sum.


Repayment conditions


Variable based on lender.


Continuous.


1-7 years.


Monthly payment


Variable.


Variable.


Fixed.


Annual fees


Some.


Some.


No.


Credit types


Revolving.


Revolving.


Installment.








Lines of Credit for Personal Use
Personal lines of credit are typically provided by credit unions as well as smaller banks, though there are some banks that offer these. Credit lines may be offered at rates ranging from 7 and 20 percent and vary widely. A line of credit may also have an annual fee that you are required to pay no matter if you utilize the funds.
A lot of lenders have an online application, however small financial institutions may require an initial phone call to begin.
When they work best The line of credit will allow you to access funds for sudden expenses. They can also be useful for ongoing projects that have time frames and costs that are variable, like home or business construction projects.
Credit cards
Credit cards are usually issued by banks or credit unions. Credit card APRs typically range from 11.99% to 24.99%. You can usually apply for a credit card on the internet and receive the card in seven to 10 business days of the approval.
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The best time to use them is They are designed to be used for daily use. You can swipe them to get gas or groceries and also use them to purchase furniture or pay for the cost of a car repair. It is recommended to keep your credit card balance under 30%, and credit cards aren't a good option for expenses that exceed that threshold.
Personal loans
Personal loans can come from a credit union or online lender. These loans tend to be unsecured and have rates between 5.99 percent to 35.99%.
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You are able to typically apply get a personal loan on the internet to check out potential prices and loan amounts. Many lenders make approval decisions within a few hours and then pay your loan in a lump sum just a few days after the approval. Repayments on your loan generally begin in the following month.
When they work best: A personal loan is an option for major single-time costs like the repair of a roof, or for .
See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get an estimate of your personal rate from a variety of lenders.



How a line of credit affects your credit score
Applying for a personal credit line is likely to cause your credit score to dip. This usually is only a temporary dip of only a few points.
Beyond that, the hinges heavily on the repayments. In time payments on credit lines that are revolving can improve your credit, but missed payments could hurt your score, so borrow only with the ability to repay it.
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Closing the account may drive up the credit utilization of your account and adversely impact your score on credit. If you are planning to replace your credit line, think strategically about it. If, for instance, you've applied for credit recently put off a few months since a string of credit applications may lower your scores.



About the writer: Annie Millerbernd is an individual loans writer. Her writing has been featured on The Associated Press and USA Today.







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