A personal line of credit gives you the option to leave some borrowing capacity unused until an expense comes up. Repaying the principal can make that capacity available again. Further withdrawals must stay within the account limit and remain permitted under the agreement.<\/p>\n\n\n\n
This flexibility can be useful when unexpected large expenses come up, and you don’t have the money to pay for them until you get your next paycheck. Easy access to money can be risky because some people may be tempted to use the money and not pay it back. This type of credit can easily build up debt.<\/p>\n\n\n\n
When considering a personal line of credit, you need to look beyond the amount you can borrow. Sometimes the repayment terms can restrict your financial budget. You need to determine how big of a financial burden the credit will put on you.<\/p>\n\n\n\n
A line of credit is a revolving debt. The amount you can borrow, your credit limit<\/a>, is set by your lender. If you owe money on your line of credit, less is available to borrow. Other account constraints may restrict availability as well.<\/p>\n\n\n\n The money you borrow is the principal. Your lender sets the terms of your account. Repaying principal may restore your available credit. Not all money you pay to your lender reduces principal. Interest is generally charged on your unpaid balance. Fees may also apply even if you owe nothing.<\/p>\n\n\n\n Taking money out from a line of credit is referred to as a draw. How the draw is processed varies from one credit provider to another. Some credit providers permit a draw to be processed as a transfer to a checking account. Others provide special checks or access cards. According to the Consumer Financial Protection Bureau<\/a>, personal lines of credit require that minimum payments be made each month. Also, there may be a charge to access the line.<\/p>\n\n\n\n The personal credit lines discussed here do not require pledged collateral. That makes them different from home equity lines of credit (HELOCs), for which borrowers put their homes up as security. An unsecured account still creates a debt you must repay. Collection activity may follow nonpayment. Reported missed payments can also harm your credit.<\/p>\n\n\n\n The account agreement determines how long borrowing remains available. Some personal lines offer ongoing access. Others set a deadline for further withdrawals. The window before that deadline is often called the draw period. A lender may review the account before deciding whether to renew access.<\/p>\n\n\n\n It is important to understand that you may not be able to wait until the end of the draw period to make payments. Payments are required during the period the credit is used. The credit agreement contains information regarding minimum payments. A minimum dollar payment may apply while you have an outstanding balance, subject to the agreement.<\/p>\n\n\n\n Some loans allow you to make only interest payments. These payments cover interest but leave the principal unpaid. You still have to repay the principal under the agreement. However, this does not mean that the debt is being repaid. Interest-only payments give the illusion that the debt is being repaid quickly.<\/p>\n\n\n\n Find out what happens to your outstanding balance when new borrowing stops. See if the agreement has a repayment schedule separate from the repayment schedule of the borrowing. Check if a larger final payment is required.<\/p>\n\n\n\n Access can also be restricted under the contract. A lender may choose to reduce the credit line or limit your ability to borrow additional funds. In either case, you will still owe the money you borrowed prior to any change in the credit line. This explains why an unused line of credit is not available funds that you can assume will be available in an emergency.<\/p>\n\n\n\n Leaving part of your credit limit untouched generally does not create an interest charge on that unused portion. Interest instead accrues on the outstanding debt. Paying down the balance sooner usually reduces that cost. Further withdrawals add to the debt on which interest may be calculated.<\/p>\n\n\n\n Variable rates cause added uncertainty. Rates can change at any time based on the account agreement. For example, a rate that is plus-or-minus the prime rate can change in the same direction as the prime rate. Your cost to borrow can increase even if you don’t increase your borrowing.<\/p>\n\n\n\n Paying down the balance in full doesn’t always mean no interest. For example, U.S. Bank’s personal line<\/a> states that there is no interest-free grace period. It also states that it uses the average daily balance to calculate interest. Therefore, to find out the terms that apply to your account, check with your loan provider.<\/p>\n\n\n\n Annual or maintenance fees will make a line of credit cost you money even if you don’t use it. Fees on withdrawals can be worse. Frequent small withdrawals can be very costly. Not all lenders charge these fees.<\/p>\n\n\n\n The method of access can also affect costs. With some credit lines, you can be charged a fee for making a withdrawal via an ATM but not for other types of transfers. Find out the cost of the method you will be using. Look at opening fees carefully. Understand the effects of late or insufficient payments.<\/p>\n\n\n\n The quoted APR<\/a> does not necessarily show the effect of every fee on open-end credit. Check the separate fee disclosures to see what else you would pay. Charges for using or maintaining the account can make borrowing expensive even when the advertised rate appears low.<\/p>\n\n\n\n Start with expected borrowing and repayment dates. Using the lender’s method of interest calculation, determine the amount of interest you will pay on the changing loan balance. Then, determine the fees you will pay for this type of use.<\/p>\n\n\n\n Think about the consequences of extended repayment. For variable interest rates, analyze your ability to absorb an increase in rate on the line. An installment loan calculator may not incorporate the effects of a rate increase or extension of loan repayment. Thus, the result of the calculator may not be reliable.<\/p>\n\n\n\n You should not spend up to your credit limit. If you want to borrow, consider how much you can repay based on your own financial circumstances.<\/p>\n\n\n\n Many people rely on borrowed money to pay their bills each month. If you find yourself in this situation, you should look for other ways to get money, so you’re not relying on loans to pay your bills each month.<\/p>\n\n\n\n There is no minimum credit score that applies to all personal lines. Each provider determines its own eligibility requirements. Your credit history may be evaluated, along with your income. Lenders may consider your income relative to your existing debt obligations to determine your ability to repay. Some lenders require you to have a checking account with them.<\/p>\n\n\n\n Bank and credit account records may be evaluated to assess cash flow<\/a>. If the lender wishes to verify your cash flow, they may request some documents. Approval to open the line of credit does not ensure you have a surplus of funds in your budget to repay the credit.<\/p>\n\n\n\n Applying for credit may result in a hard pull on your credit report, which can affect your score. A soft pull will not impact your score. Make sure to ask the credit provider what kind of credit pull they will do.<\/p>\n\n\n\n If your account is reported as a revolving credit account, your credit score may be negatively impacted if you keep a high balance on your credit line. The Consumer Financial Protection Bureau’s (CFPB) information on credit scores<\/a> provides more information on credit scoring and credit utilization.<\/p>\n\n\n\n Reported late payments can also harm your credit score. Opening a credit account will not necessarily improve your credit score.<\/p>\n\n\n\n Personal loans<\/a> usually give you a single lump sum. You then repay the loan in a series of smaller payments. While this can work for larger, one-time expenses, a personal line of credit gives you more flexible options to pay for expenses as they occur. While the account permits new draws, repeated borrowing can make the payoff date less predictable. Required payment dates still apply.<\/p>\n\n\n\n Neither product is automatically cheaper. Look at the cost to get the same value in a similar time frame. A fixed-rate loan provides a regular and forecastable repayment schedule. With a line, your actual borrowing behavior could alter the result.<\/p>\n\n\n\n There are other ways to pay a bill besides taking out a loan. The bill provider might give you a payment arrangement or support. Find out how much it would cost to use that service before deciding to borrow money to pay the bill. Would it be possible to pay the bill later? If so, that might be a way to avoid needing a loan.<\/p>\n\n\n\nWhat happens when borrowing access ends?<\/h2>\n\n\n\n
Why the cost can change while you owe money<\/h2>\n\n\n\n
Interest follows the outstanding balance<\/h3>\n\n\n\n
Fees can matter even when you borrow little<\/h3>\n\n\n\n
Estimate the cost around your repayment plan<\/h3>\n\n\n\n
When flexibility can help<\/h2>\n\n\n\n
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Where repeat borrowing becomes a problem<\/h2>\n\n\n\n
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Qualifying for a personal line<\/h2>\n\n\n\n
How it compares with a lump-sum loan<\/h2>\n\n\n\n
Deciding whether the repayment plan is realistic<\/h2>\n\n\n\n