In addition, if you make late payments, your credit score may decrease.
Secured lines of credit
A home equity line of credit, or HELOC, is one option for obtaining a secured line of credit.
HELOCs allow you to borrow against the equity in your house and use it as security for a line of credit. They usually have a variable interest rate, which means your payments will rise over time.
In general, the bank will limit the amount you can borrow to up to 85 percent of the appraised value of your house, less the balance on your first mortgage. In addition, when banks determine your interest rate, they consider criteria other than your credit scores, such as your credit history and income.
If you are not a homeowner or do not wish to use your home as collateral, you may be able to obtain a line of credit secured by a savings account or certificate of deposit.
What are the drawbacks of a secured line of credit? First, if you cannot make the payments, the lender may repossess the asset that secured the loan.
Unsecured lines of credit
If you default on an unsecured line of credit, you may not lose your home or money. However, the lender assumes more risk with unsecured loans, resulting in higher interest rates than with a secured line.
Each unsecured line of credit has its own set of terms. The restrictions could be anywhere from a few thousand to a few hundred thousand dollars. In addition, some credit lines have fees attached to them; for example, you may have to pay an annual charge to keep the account active.
What is the distinction between a credit card and a credit line?
Credit cards are comparable to credit lines. Both are revolving credit lines, which means you can borrow money up to the credit limit, then repay it (plus any interest you owe) and borrow it again.
However, credit cards and lines of credit are two different products offered by lenders, with significant variations.
There is no draw period with credit cards; you can use the card for as long as the account is open and in good standing. In addition, many have rewards programs, and if you can pay off your debt on time and in full each month and your card has a grace period, you may avoid paying interest entirely. This means that, if used appropriately, credit cards may be a better alternative for everyday expenditures.