A personal line of credit resembles a credit card:
There's a specific amount you can borrow against (much like the limit on most credit cards). You may use it for any purpose. You may use it whenever you want. You can pay off the balance over a long period.
Whether you're renovating your home or consolidating debt a line of credit allows you to withdraw funds up to the credit limit, and pay down at your convenience, provided monthly minimum payments are made.
Opening a personal LOC usually requires a credit history of no defaults, a credit score of 670 or higher, and reliable income. Having savings helps, as does collateral in the form of stocks or certificates of deposit (CDs), though collateral is not required for a personal LOC.
Basically, you can treat your line of credit like a more affordable credit card, and use it for: Purchases for the home, like appliances, televisions, furniture, furnishings and décor. Groceries and dining out. Vacations and weekend getaways.
Interest is charged on a line of credit as soon as money is borrowed. Lines of credit can be used to cover unexpected expenses that do not fit your budget. Potential downsides include high interest rates, late payment fees, and the potential to spend more than you can afford to repay.
Your credit card company determines your credit limit, which is the maximum amount you can spend on your credit card.
After you're approved and you accept the line of credit, it generally appears on your credit reports as a new account. If you never use your available credit, or only use a small percentage of the total amount available, it may lower your credit utilization rate and improve your credit scores.
The process of paying back the line of credit is simple. You pay back part or all of the capital borrowed from your line of credit at your own pace. However, you must repay the minimum payment shown on your monthly statement.
Credit cards are a type of revolving credit, meaning they extend to you a line of credit that has a specific limit which renews every month.
The only way to access funds from your line of credit is through your linked chequing account. And if you wish to transfer funds from your line of credit, you can only do so to your primary chequing account – which may or may not be the chequing account linked to your line of credit.
Paying off a credit card with a line of credit can positively affect your credit score as long as you make consistent payments according to your payment schedule. A line of credit will even make it easier to keep up with these payments since you'll be paying less in overall interest.
For example, if you're remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.
If you need ongoing access to funds, or if you don't know the full cost of a project, a personal line of credit may be better. With these types of personal lines of credit, you can use the credit as needed, and only pay interest on the funds you borrow.
Lenders generally prefer that you use less than 30 percent of your credit limit. It's always a good idea to keep your credit card balance as low as possible in relation to your credit limit. Of course, paying your balance in full each month is the best practice.
Convenience and ease of use: You can access funds from a line of credit through ATM cash withdrawals, cheques, or online transfers. No annual fee: Most lines of credit don't have an annual fee, and the only additional cost is interest on the credit balance you utilize.
To access money from your line of credit, you may: write a cheque from your line of credit. use an automated teller machine (ATM) pay a bill using telephone or online banking.
Paying a bill using a credit card or line of credit is treated the same as getting a cash advance. You'll be charged interest from the time you make the payment, just like you would for a cash advance.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
A good credit score is recommended to get a line of credit. Some credit lenders will give you an LOC with scores around 660. However, the ideal score for approval is 720 or higher. Some private lenders will give lines of credit to those with bad credit, but those do have higher rates.
Just like a credit card, a personal line of credit gives you access to funds immediately. And you only pay interest on the money you use. That's super handy when you have a big project or bill with lots of unexpected costs or if you want to consolidate high-interest debt.
Any approved transactions above your credit limit are subject to over-the-limit (or over-limit) fees. This credit card fee is typically up to $35, but it can't be greater than the amount you spend over your limit. So if you spend $20 over your limit, the fee can't exceed $20.
A good guideline is the 30% rule: Use no more than 30% of your credit limit to keep your debt-to-credit ratio strong. Staying under 10% is even better. In a real-life budget, the 30% rule works like this: If you have a card with a $1,000 credit limit, it's best not to have more than a $300 balance at any time.
Helps keep Credit UtiliSation Ratio Low: If you have one single card and use 90% of the credit limit, it will naturally bring down the credit utilization score. However, if you have more than one card and use just 50% of the credit limit, it will help maintain a good utilization ratio that is ideal.