A personal line of credit is a type of financing that allows you to withdraw funds, as needed, up to a predetermined limit. There are a few important factors you should keep in mind:
Personal line of credit interest rates are variable, which means they are subject to change at any time. This can make it more difficult to predict your monthly payment and total financing cost. However, the bank or issuer must give you advance notice that your rate is changing.
With lines of credit, you only pay interest on the money you borrow, which makes them a good option if you won’t know the final cost of a financing venture. Interest accrues as soon as you withdraw funding and will be added to your monthly payment.
In contrast, fixed-rate personal loans come with a set interest rate and repayment schedule. You pay interest on the total lump sum borrowed, not just on the money you use.
Home renovation or repair
Emergency funding
Ongoing medical costs
Moving and relocation expenses
Wedding deposits
Business startup costs
Funeral expenses
It’s possible, but it may be difficult. Personal lines of credit are typically reserved for consumers with a good credit score, which is 670 or higher using the FICO scoring model. Since personal lines of credit aren’t secured by an asset like your car or a house, your credit is weighed as your ability to repay what you borrowed. This also means that you could see higher interest rates than you would with a secured line of credit, such as a HELOC.
In some cases, it may not be a good idea to get a personal line of credit. You could consider alternative financing options, such as a credit card or personal loan — more on that below.
The best financing option will depend on your financial situation and unique needs. While a personal line of credit isn’t a good option for everyday purchases like groceries due to withdrawal fees, it could be an efficient way to finance a project when you don’t know the total cost.
No, a personal line of credit is a revolving account that you can use like a credit card, in that you only withdraw the funding that you need. But credit cards and personal lines of credit have different methods for withdrawing funds. Plus, credit cards have an interest grace period, whereas you’ll start accruing interest on a personal line of credit as soon as you withdraw funds.
Banks or lenders may require a hard credit inquiry when you formally apply for a personal line of credit. This can cause a temporary drop in your credit score, but it’s not a derogatory mark. If you utilize too much of your available credit, your credit utilization percentage will go up, which can have a negative effect on your score. If you miss payments, your credit score will likely take a hit.
On the other hand, making on-time and in-full payments on your line of credit can help you build a healthy payment history, which can increase your credit score.
Personal lines of credit are reserved for those with good and excellent credit. You’ll need a score of around 670 or higher to qualify.
Personal lines of credit allow you to borrow and pay interest on only the money you need. You may see lower APRs than what’s offered by a credit card issuer. This financing option works well for long-term projects without a set final cost. And there’s no collateral, so you don’t risk losing an asset like your car or home.
Personal lines of credit may not be a good option for borrowers with bad credit or for consumers who struggle with overspending. Since this financing option has variable interest rates, it’s hard to nail down how much you’ll pay in interest. If you would prefer fixed payments and a clear timeline for repayment, then you may prefer a personal loan instead.
Personal lines of credit have variable payments that depend on how much you borrow and what the interest rate is. Payments typically begin as soon as you borrow, and you’ll have to make a minimum monthly payment, much like a credit card. Payment schedules vary between institutions.