How to Manage Your Credit Line

There’s a reason why lines of credit are so popular: they let you draw money only when you need it, without having to borrow a big lump sum, and they offer flexibility on your monthly payments. Unfortunately, having access to all that cash can sometimes tempt you to overspend. Combine overspending with a period of rising interest rates and, before you know it, your line of credit can begin to spiral out of control.

If all this sounds far too familiar, don’t despair. Here are some strategies to help get your borrowing back under control:

Pay more than the required minimum

Lines of credit require only a small minimum payment each month, often as low as interest only. While this is one of their greatest conveniences, paying the minimum each month ensures your debt will continue indefinitely. One of the best ways to manage your line of credit and stay in control of your debt is to pay down some of the principal every month.

Refinance to a home equity loan

If you are a homeowner, perhaps your credit line is secured against the value of your home. The good news is that by having a home equity line of credit, as opposed to an unsecured loan, you are getting one of the best possible rates of interest. However, if you find yourself lacking in self-discipline and tapping your credit line to make impulse purchases, you may want to think about refinancing to a home equity loan. You will continue to get the benefit of a lower interest rate, but the money will arrive as a lump sum, which you can use to pay off your line of credit.

And because you will no longer be able to draw additional funds without going through the procedure of applying for another loan, it will help remove the danger of overspending. Unlike your line of credit, a home equity loan is also amortized, meaning you pay the same amount each month, and your payment is a mixture of principal and interest. This forced discipline will help you pay off your debt faster.

Consider cash-out refinancing

Another option to consider is cash-out refinancing. This involves taking out a new mortgage with a higher principal than your current one, and then using the extra cash to pay off your credit line. As with a home equity loan, you will receive a lump sum. And you won’t be able to access more money down the road without refinancing (or taking out a home equity loan or line of credit). The advantage of this option is that first mortgages generally carry a lower rate than home equity loans. Plus, you’ll have only one credit payment each month instead of two.

Lock into a fixed-rate loan

Interest rate trends may influence which option is better for you. When rates are rising, it may make more sense to switch to a fixed-rate home equity loan. This is because your line of credit carries a variable interest rate. So if rates are headed upward, locking in may be a good idea.

At the same time, if you took out your primary mortgage when rates were lower than they are now, cash-out refinancing may be less attractive as you may be unable to refinance for as low a rate as you have now. Of course, in an environment of falling rates, the reverse would be true. If current interest rates are lower than they were when you took out your mortgage, cash-out refinancing may provide you not only with the cash you need to pay off your line of credit, but also with a lower rate on your mortgage.

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