A line of credit is a type of revolving credit account that allows you to borrow money, pay it back and then borrow again, as long as you don’t exceed the preset credit limit. Interest is charged only on the amount borrowed. As you repay the balance, the amount repaid becomes available to borrow again.
The typical types of lines of credit are credit cards, home equity lines of credit and personal lines of credit.
Credit cards are linked to your personal financial information and allow you to make purchases without having cash. Your credit card company will set a limit for you, and you can use your card to spend up to that limit. You will then be expected to repay what you spent. Remember, credit cards do have costs including APR and interest rates, so don’t charge what you can’t afford to repay.
Home equity lines of credit allow you to borrow against the equity in your home. They usually carry variable interest rates., The lender sets a limit on the amount that you can borrow, and you can get cash out up to that amount. You can usually access your line through checks, special credit card or through online banking. The interest that you pay on a home equity line of credit may be tax deductible (consult your tax adviser). Home equity lines of credit are usually an inexpensive way to borrow money but that does not mean you should use a home equity line of credit for just anything. If you fail to repay your debt and you default, your home is at stake.
Personal lines of credit offer access to money similar to a credit card – you can use money from your line of credit up to the set limit, and you pay it back with interest. You can link the line of credit to another bank account to provide overdraft protection. This feature allows you to spend more money than you have in your bank account by pulling the extra funds needed from the line of credit. Overdraft protection can be a great feature for your bank account, but that doesn’t mean that it is a good idea to overdraw your account. It can be tempting to continue spending, but you will be expected to replenish the funds spent, plus interest.
July 12, 2006
