Understanding How Does a Personal Line of Credit Work

A personal line of credit is essentially a revolving loan that allows you to borrow and repay funds as needed. You can think of it like a credit card, but with a more flexible repayment schedule.

The lender sets a credit limit, which is the maximum amount you can borrow at any given time. This limit is usually based on your creditworthiness and income.

You can use the funds for almost anything, from paying off high-interest debt to covering unexpected expenses. Just be aware that interest rates may apply, which can vary depending on the lender and your credit score.

Repaying the loan works similarly to a credit card, where you make minimum payments each month to avoid interest charges. However, you can also choose to pay more than the minimum to pay off the principal balance faster.

Personal lines of credit come in various forms, each with its own set of requirements and characteristics.

Revolving credit lines, such as credit cards and home equity lines of credit (HELOCs), allow you to borrow and repay funds as needed, with interest only charged on the outstanding balance.

Unsecured credit lines, including credit cards, personal lines of credit, personal loans, peer-to-peer loans, and payday loans, do not require collateral and can be used for various purposes, from daily expenses to big-ticket purchases.

Here are some common types of unsecured personal lines of credit:

Revolving lines of credit allow you to borrow money and make payments on an ongoing basis as long as you don't exceed the account's credit limit.

With a revolving line of credit, the amount of available credit goes down as you use it and goes back up as you pay it back.

Nonrevolving lines of credit are similar to revolving lines of credit, but once the money is used and paid back, they are typically closed and can no longer be used.

Examples of revolving credit lines include gas station and department store credit cards, as well as most Discover, VISA, and MasterCard credit cards.

Home equity lines of credit (HELOCs) are also revolving lines of credit, with the amount you can borrow based on a percentage of your home's appraised value.

Nonrevolving lines of credit are closed once you use the money and pay it back, making it a one-time transaction.

When choosing a personal line of credit, you have two main options: secured and unsecured. Secured lines of credit require collateral, such as a car or home, which the lender can seize if you fail to repay the loan. This typically offers lower interest rates and higher spending limits.

A secured credit line is one in which the borrower uses an asset as collateral to secure the loan. This can be a car or home, and the lender can take the asset if the borrower doesn’t repay the debt. Because of the asset, banks and creditors usually offer lower interest rates, higher spending limits, and better terms on secured lines of credit.

On the other hand, unsecured lines of credit need no collateral. A creditor accepts the risk that a borrower will repay the debt. It’s usually difficult to get an unsecured LOC approved unless you are a well-established business or someone with an excellent credit rating.

Examples of unsecured credit lines include credit cards, personal lines of credit, and personal loans. These are usually not for day-to-day spending but for projects, such as a home-improvement upgrade or a bigger one-time purchase, like a home appliance.

If you don’t repay an unsecured debt, the lender may hire a debt collector or sue to collect. Unsecured credit is riskier for lenders than secured credit, so they typically charge higher interest rates and fees for unsecured credit lines.

Most personal lines of credit are unsecured, but there are two popular types of secured personal credit lines: home equity lines of credit (HELOCs) and CD-secured lines of credit. A HELOC allows you to borrow against the equity in your home, which is the amount by which its appraised value exceeds the unpaid balance on your mortgage.

Here are some key facts about secured and unsecured lines of credit:

A CD-secured line of credit uses money you have on deposit in a certificate of deposit (CD) as collateral. You may be able keep a CD-secured line of credit open for more than the three- to five-year spans that are common with unsecured personal lines of credit.

Other revolving sources of credit can be a bit unconventional, but they're worth considering. Overdraft protection on checking accounts is one such source, which can be a lifesaver in case of unexpected expenses.

You can also find revolving personal checking lines at some banks and credit unions. These lines establish a credit limit, and you can write checks against that amount instead of depositing money into the account.

Some credit cards, like travel and entertainment cards, are designed for frequent travelers. These cards allow you to pay for car rentals, dinner, and other expenses, and you can earn rewards points in the process.

Here are some lesser-known revolving credit sources:

To get a personal line of credit, you can start by checking your rate and then applying. This can be done in person, over the phone, or online. You'll need to provide some information, such as your social security number, date of birth, address, employment information, and monthly income.

If you're a current client of a bank like Global, you can apply for a personal line of credit in person, over the phone, or online. You can also apply for a personal line of credit from other banks and credit unions. Some banks, like U.S. Bank, may have specific requirements, such as a FICO score of 680 or above, to qualify for a personal line of credit.

You can borrow up to $25,000 with a personal line of credit, which can be a great option for ongoing access to available funds or when you don't know the full cost of a project. You'll only pay interest on the money you borrow, making it a more affordable choice than other funding options.

To apply for a personal line of credit, you can follow these simple steps. You can check your rate first to see what you're eligible for.

You can apply for a personal line of credit in person, over the phone, or online. This is the same process as applying for a regular loan.

You'll need to provide some basic information to complete your application, including your social security number, date of birth, address, employment information, and monthly income.

You can apply in person, over the phone, or online, so choose the method that works best for you.

Now that you've been approved for a personal line of credit, it's time to close on the deal. You can close on your line of credit online, which is convenient, but some customers may need to visit a U.S. Bank branch to complete the process.

Funds are available within one business day of closing, so you can start using your line of credit quickly.

Access to funds is one of the most convenient aspects of a personal line of credit. You can access your funds in various ways, including using a Visa Access Card, writing Personal Line Access Checks, or visiting an ATM.

You can also access your funds online, through the mobile app, or by calling 24-hour banking. These options make it easy to get the money you need when you need it. If you prefer to visit a branch, you can do that too.

Here are the different ways to access your funds:

Keep in mind that you can also set up your line of credit as overdraft protection for your checking account, which can provide an added layer of security.

A personal line of credit can be used to cover various expenses, such as unexpected or ongoing projects, like a wedding or home renovation.

Lines of credit can offer flexible funding options for large or unexpected expenses, similar to a credit card.

But what sets a line of credit apart from a credit card? While both can provide access to funds, a line of credit may have different terms and requirements.

A Home Equity Line of Credit (HELOC) is a loan secured by the equity in your house. Your equity is defined as home's market value minus its outstanding mortgage balance.

Rarely can you borrow against all the equity in your home, lenders apply a formula to the maximum size of a HELOC, expressed as the combined loan-to-value (CLTV) ratio. A lender's maximum CLTV ratio is usually around 80%.

You can qualify to borrow up to 80% of your home's value, minus the outstanding mortgage balance. For example, if your home is worth $400,000 and you owe $150,000, you may qualify to borrow up to $170,000.

The lender's primary concern is whether the applicant is a worthy risk, not how you spend the money. You should have smart financial reasons to erode your home equity.

Home renovation projects are a key use for a HELOC, adding value and livability to your dwelling. The IRS allows itemizers to deduct some of the interest paid on a HELOC, up to $750,000 for combined mortgage debt for married-filing jointly taxpayers.

Using a HELOC for home improvement may allow you to deduct the interest paid on your taxes. Consult a tax professional to confirm.

Transaction fees are a common aspect of personal lines of credit, and it's essential to understand how they work. Most personal lines of credit have a transaction fee charged when you access funds in advance.

This fee can add up quickly, so it's crucial to factor it into your budget. If you're not careful, you might find yourself paying more in fees than you anticipated.

Lines of credit can offer flexible funding options, but be aware of the potential costs involved.

A personal line of credit can be a flexible way to help you reach your goals, especially if you're not sure exactly when you might need the money.

They generally require that you have good credit, which can be a con for those with poor credit history.

A line of credit can offer flexible funding options for large or unexpected expenses, making it a good option for covering a variety of expenses, including those that are unexpected or are part of an ongoing project.

However, they may come with a higher interest rate than similar products like a term loan or a credit card, which can increase your costs over time.

A personal line of credit carries a variable interest rate that accrues on the money you borrow, which means the interest rate might change according to the terms of your contract.

This can be a con for those who prefer fixed interest rates, but a pro for those who can take advantage of lower interest rates.

A line of credit is usually unsecured, meaning you don't need to put up collateral like your car or house, which can be a pro for those who don't want to risk losing their assets.

However, this also means you'll need to have good credit to qualify for a line of credit, which can be a con for those with poor credit history.

The interest you pay on a line of credit only gets calculated on the amount of money you use, which can be a pro for those who only need to borrow a small amount.

But if you're borrowing a large amount, the variable interest rate might increase your costs over time, which can be a con.

A line of credit offers flexible access to funds, similar to a credit card, but with some advantages over credit cards, such as no impact on your credit score when you check your eligibility.

However, a line of credit usually carries a variable interest rate, which can be higher than what you'd pay on a credit card, especially if you carry a balance.

Overall, a line of credit can be a good option for those who need flexible funding options and have good credit, but it's essential to carefully consider the pros and cons before applying.

Building a good credit score is crucial before applying for a loan or line of credit.

Know what to expect before making any financial decisions, and you'll be better equipped to handle the process.

To build a good credit score, you need to practice good credit habits.

Follow these 5 steps: know what to expect before applying, know your credit score, pay bills on time, keep credit utilization low, and monitor your credit report.

By following these simple steps, you'll be well on your way to maintaining a healthy credit score.

Remember, a good credit score can open doors to better loan options and lower interest rates.