Personal lines of credit are typically unsecured, which means you do not need to provide collateral to obtain the line of credit. Secured credit lines are secured by collateral, such as your home or a savings account.
When applying for a line of credit, having a higher credit score may allow you to qualify for a reduced annual percentage rate. Some credit lines may have costs, such as a yearly charge, as well as borrowing limits.
After you’ve been approved for the line of credit, you’ll have a specific time frame — known as the “draw period” — during which you can withdraw funds from the account. A draw phase can last several years. Then, when you’re ready to borrow money, the bank may issue you special checks or a card, or it may transfer the funds to your checking account.
When you borrow money from your line of credit, interest typically begins to accumulate, and you must start making at least the minimum payments, the amount of which is added back to your available line of credit as you make them. However, once your draw period is through, you’ll enter the repayment period, during which you’ll have a certain amount of time to pay off any remaining balance. So keep in mind that merely making minimum payments may end up costing you more in interest in the long run.
What effect will a credit line have on my credit scores?
The lender may conduct a hard inquiry on your credit reports as part of the application process for a line of credit. This may temporarily reduce your credit score by a few points.
When you accept the line of credit, it will generally appear as a new account on your credit reports.
Suppose you never utilize your available credit or only use a small proportion of the total amount available. In that case, your credit usage rate will be reduced, and your credit scores will improve. Your utilization rate indicates how much of your available credit you are utilizing at any given time. If you borrow a large percentage of the available credit, your utilization rate may rise, thus harming your credit scores.