The 411 On Personal Credit Lines

The 411 On Personal Credit Lines

By: Barri Segal - Posted in:
Young lady proudly opening her first line of credit

What Is a Credit Line?

A credit line is an amount of money that a financial institution agrees to lend you. You draw money from the line of credit as you need it — and you pay interest only on the amount you borrow.

Banks and credit unions offer customers lines of credit, which give them access to a preset amount of money. If you qualify for a line of credit, you draw on it for a predetermined amount of time, paying interest only on the amount you use.

Once you pay back the amount you borrowed, it’s available again for you to use. A credit line is a good solution for those working on projects such as home renovations, because you can use the money over a period of time that is also known as the “draw period.”

What is a Personal Credit Line?

Line of Credit Image

Think of a personal line of credit as an unsecured, revolving account you can draw on as you need it. A credit line comes with a variable interest rate and it’s more flexible than a personal loan. In addition, it does not require collateral like a home equity line of credit.

The maximum amount you can borrow for a credit line will vary among financial institutions and depend on your credit score. Of course, personal lines of credit with great terms are available to those with strong credit scores. To access your personal line of credit, a financial institution might provide you with checks or a card — or enable you to draw from  it online.

You can use a personal line of credit for just about anything. These are some common ways people use personal credit lines:

  • Home renovations
  • Vacations
  • Pay off for medical bills
  • Paying for a child’s college education
  • Paying for a whopper of a tax bill
  • Emergency Situations

Lines of Credit Rates

Rates for lines of credit vary widely among financial institutions — and depend on your credit rating. Generally speaking, lines of credit interest rates are comparable — or lower — than credit cards. If you want to figure out what your rate for a line of credit would be, use a calculator like the one on the Wells Fargo website. Simply enter your zip code, the amount you want to borrow and your credit score. You’ll be able to find out a range of what your monthly payment would be in addition to the APR you’ll pay.

Lines of credit typically come with fees. For example, Wells Fargo charges a $25 annual fee for a line of credit. Make sure you understand any fees you’ll be paying for your line of credit before you sign on the dotted line.

How to Get the Best Personal Line of Credit

The No. 1 way to get the best personal line of credit is to have a strong credit score. If yours isn’t up to snuff, take steps to improve it before you apply. Once your credit score is strong, you’ll get the best loans and terms available on a line of credit. If your credit isn’t so strong, you might improve your chances of getting approved — and lower your rate — if you offer the lender an investment, such as a savings account or certificate of deposit, so he or she can partially secure your credit line.

Another way to get the best personal line of credit is to compare what different lenders are offering. You’ll want not only the best terms and interest rates but the lowest fees on a personal line of credit. Once you find a line of credit that you think will work for you, don’t be afraid to ask the lender any questions you might have — it is essential you understand every facet of the loan.

The Bottom Line

Before you take out a line of credit, check your credit. If it’s great, full speed ahead- if it’s not, take steps to boost it so you can improve your odds of getting approved and get a better rate. Next, figure out how much you want to borrow and how you want to spend the money. Finally, make your payments on time every month and improve your credit even more.

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