The disadvantage of credit cards is that they may have higher interest rates than lines of credit, so carrying a load on one may cost you more. They may also have lesser credit limits than personal lines of credit, and you may be charged exorbitant fees and APRs if you take out cash using a credit card cash advance.
Tips for using a line of credit
Before you take up a line of credit, whether secured or unsecured, check your credit ratings and take actions to enhance your credit health so that you can qualify for a reduced interest rate. Then determine how much money you require and how you intend to spend it.
According to Bruce McClary, vice president of communications at the National Foundation for Credit Counseling®, asking for a line of credit may be a good choice if you need a flexible means to access money.
However, he adds, “if you’re borrowing to prevent going into financial difficulties with another loan… there’s a deeper issue that needs to be addressed that can’t be addressed by continuing a cycle of borrowing.”
Here are some suggestions for when — and when not — to use a line of credit.
When not to use a line of credit
- If you know you won’t be able to make your payments or your income is unreliable, a line of credit may not be a viable option. If you fail to make payments on time, your credit will most certainly suffer. Furthermore, under a secured line of credit, the lender may seize the collateral.
- Depending on your creditworthiness, you may be able to get an unsecured personal loan with better rates than an unsecured line of credit if you know exactly how much you need and don’t want to use collateral.
- If you’re utilizing the line of credit to meet basic needs or to support short-term luxuries like dining out and vacations, it could be a sign that you’re in financial trouble and shouldn’t take on new debt.
When to use a line of credit
- A HELOC or secured line of credit may be an excellent idea if you need money for a home renovation project, education expenditures, or other types of significant expenses. As long as you know, you’ll be able to return it. In addition, the interest you pay on the HELOC may be tax-deductible.
- An unsecured personal line of credit may enable you to consolidate multiple modest obligations you’re repaying into a single payment with a lower APR while avoiding the use of collateral (depending on the terms of each line of credit and your creditworthiness).