I can give myself a bank loan at will just by writing a check to myself. This is why I’m hot.
Just kidding! Although in reality, I can do that, but it’s because I opened a personal line of credit with a credit union that I’m a member of. Not a credit card; a credit line. Here’s what I have to say about ’em.
What Is A Personal Line of Credit?
Personal lines of credit are loan accounts that you open with banks or credit unions, that work like so:
1. Request it, with a certain limit. Let’s say $10,000.
2. Go through the approval process. This is similar to that of a credit card, and may entail questions about your job, income, and assets. Your credit will be checked with at least one credit bureau.
3. If approved, you will see a new account in your name (the bank line of credit), and you can request checks for that account. It will be listed in your credit report as a personal line of credit or bank line of credit.
How to Take Out A Line of Credit Loan
Once approved, you can write a check (a personal check) to anyone that will accept it (even to yourself). Once that check is cashed, it will become a bank line of credit loan from the bank to you. You will then have to repay that loan, via a minimum monthly payment (which you can increase to pay off the loan at any time). If you have not used up your credit limit, you can keep borrowing until you do. The monthly minimum repayment amount will vary, depending on how much you borrowed.
Any amount borrowed with the line of credit loan will accrue interest until it’s paid off, usually at a pretty high rate (at least ~10% per year); it will normally be lower than a credit card’s, though.
You can borrow and repay at will, until you either pay off and close the account or the bank closes it for you. Generally, the bank can also change the interest rate on the line of credit loan whenever it wants, at least on available credit that you have not used yet. If you use zero credit, you pay zero interest.
Repayment times vary, but can stretch into the years.
Their Use Is For An Emergency Loan
Generally, the best and only use of a bank line of credit is for an emergency loan, in my view. Let’s start with the fact that these are high-interest loans. Therefore, since it’s always to your detriment to pay interest, you should never use these within the ordinary course of your life. I fiercely resist using mine.
However, if life throws you a nasty curve ball, it’s good to have one of these, since it can get you out of an emergency situation by giving you cash when you need it most. That’s why it’s best to request it when everything’s dandy and your credit is good, since you stand a better chance of being approved than if you request it when the storm has arrived and you may be borrowing elsewhere (thereby affecting your credit).
Speaking of your credit, an unused credit line will probably help your credit score, since it will count as available credit, of a different variety than credit cards. (Here’s a guide on what makes up your credit score).
Also, I do not recommend you use a personal line of credit to pay off a higher-interest credit card, since fixed-term personal installment loans are better for that purpose because they usually carry lower interest rates than credit lines.
A Word of Caution
Only open a personal credit line if you’re good with credit in the sense that you use credit cards well (paying off the full balance every month) and don’t tend to fall into debt spirals. If you are prone to debt issues, don’t get a bank line of credit, since it will probably hurt you more than it will help you.
Summing It Up
A personal line of credit is good to have, provided that you only use it for an emergency loan. If you can limit its use in that way, I’d suggest you get one while your credit is best, since that’s when you’re most likely to get approved.
Then, the bank line of credit can give you that final layer of financial security, if you ever find yourself in a situation where you need it.
Have you ever had a credit line? Have you used it?
H/T: “This Is Why I’m Hot” (song), by MIMS. GIFs from Giphy.
Miguel, te leo y me encanta, las fotos ahora son más y les están quedando tan bien, los felicito!
Anina(amiga de tus papás)
The Rich Miser says
Enoch (Savvy New Canadians) says
Great Article. Yes, personal lines of credit are a great way to diversify one’s credit and improve one’s credit score. As you have mentioned, the caveat is to ensure that you are only obtaining additional credit if you know you will stay disciplined. Indebtedness is usually just an expense away.
The Rich Miser says
Absolutely. The key is responsible use, which normally means no use at all.