For ongoing credit needs, revolving credit sources like credit cards or line of credit are the most useful, but may come with increased fees. Loans may have higher upfront fees but could cost less in the long run. Evaluate your credit needs before applying to find the best fit.
Loans are best for large, one-time purchases.
For example, the large lump sums required to purchase a new car or home are one-time expenses where the flexibility of a line of credit doesn't matter.
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.
Lenders often have higher credit score requirements for lines of credit compared to personal loans. For example, borrowers should aim to have a minimum credit score of 670 when applying for a line of credit.
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.
Like credit cards, a line of credit is considered revolving debt and treated similarly when generating your credit score—if you make your payments in full and on time, it will reflect positively in your credit score.
A personal line of credit resembles a credit card:
You may use it whenever you want. You can pay off the balance over a long period. And in most cases, as you pay off the balance, you free up the loan amount to borrow against again. (This is the classic definition of “revolving credit.”)
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.
The average interest rates for a personal line for credit range from 8% - 10%. The average rate for a home equity line of credit, or HELOC, is 5.35%. Credit cards generally have the highest rates of any line of credit. Securing an LOC may get you a lower rate, but may also be a greater financial risk.
Usually, the interest rate on a line of credit is variable. This means it may go up or down over time. You pay interest on the money you borrow from the day you withdraw money, until you pay the balance back in full. Your credit score may affect the interest you'll pay on a line of credit.
Just because you accept a line of credit doesn't mean that you have to use it. By accepting the line of credit, you are changing the percentage of your credit utilization and adding another positive tradeline to your report, if you are looking to increase your credit quickly then this is a good idea.
Using a line of credit to pay off your credit card has several advantages. First, you'll save money if the interest rate is lower than your credit card. Second, even if you only make the minimum payments, you'll pay it off more quickly than you'll pay off a credit card making minimum payments.
Increase in your credit utilization ratio
Your credit utilization ratio is the amount of your open credit lines—across all accounts—that you're currently using. This part of your profile accounts for 30% of your FICO score. And when you close a credit card, you're reducing available credit.
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.
Borrowing money
You can apply for a personal loan or a personal line of credit and use this as your down payment. Some financial institutions don't allow this, however, because one of the aims of a down payment is to demonstrate that you have the financial resources to buy a property.
If you're just starting out, a good credit limit for your first card might be around $1,000. If you have built up a solid credit history, a steady income and a good credit score, your credit limit may increase to $5,000 or $10,000 or more — plenty of credit to ensure you can purchase big ticket items.
This is a problem common to many people with small business credit cards. A $15,000 credit limit is objectively good. But you might think a $15,000 credit limit is bad if your company needs to charge $25,000 every month. Having to make multiple card payments just to use your card is inconvenient at best.
Requirements for a $3,000 Personal Loan
Credit score: Some personal loan lenders, such as Upstart, allow you to apply with a very low credit score. However, most set a minimum. Discover, for example, requires a minimum credit score of 660, while some others require a minimum of 700.
This depends on your financial situation. For those with a good credit score — around 670 and up — a $30,000 personal loan may be pretty easy to get.
Consider Qualification Requirements
We recommend a minimum score of 670. Income: Some lenders may want confirmation that you earn a minimum salary before issuing you a personal loan, but not all lenders will disclose the minimum income they require. Debt-to-income ratio (DTI).
Yes, paying off a personal loan early could temporarily have a negative impact on your credit scores. But any dip in your credit scores will likely be temporary and minor. And it might be worth balancing that risk against the possible benefits of paying off your personal loan early.
A line of credit allows you to use the funds you need, up to the agreed-upon limit. Depending on the lender's terms, you will only have to pay either the current interest on the loan each month or a predetermined percentage of your balance. You can then pay off your balance at a pace you find comfortable.
Pay more than the minimum. Expand
The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal.