Do you Need that Personal Line of Credit?

Needing money in a pinch can be challenging. Often, banking products like personal lines of credit take time to apply and get approved. Using a credit card with a high-interest rate, resorting to cash advances or applying for a payday loan can leave some struggling to cope with the payments afterward.

Choosing to open a line of credit in advance of needing one can ensure it is there when you require it.

What is a line of credit?

The way to best describe a line of credit is as flexible funds that can be used for pretty much anything—home renovations, vehicle purchases, daily spending or consolidating debt.

Lines of credit types:

• Unsecured: Apply through an application process and get approved for a set amount of funds you can use for everyday purchases.
• Secured: Apply for a lower interest rate using your assets (like your home), to fund larger purchases or consolidate debt.

Offered by financial institutions, they typically have a lower interest rate than your credit card, making them especially attractive to those with high-interest credit card debt. Lines of credit usually have limits ranging from $5,000 and up, to which you have unlimited 24/7 access.

A line of credit allows the account holder to keep reusing the funds, and interest only accrues on the amount you borrow. Unlike a personal loan, users don’t have to use the full amount all at once and can access as much of the funds as they need, as they need it.

To make payments on your line of credit, you may be able to set up weekly, bi-weekly, semi-monthly or monthly payments. Similar to a credit card, lenders require account holders to pay a minimum dollar amount or percentage of the funds borrowed every month. However, it is good practice to pay off your line of credit in full each month.

How is interest calculated on a line of credit?

Lines of credit typically have variable interest rates, meaning rates can fluctuate and won’t always be the same. Generally, the banks base their rates on the prime rate; however, your credit score may also impact the rate you get. Those with better scores may access more ideal rates.

Interest will start to accrue from the day you borrow money. The financial institution will calculate the interest daily on your balance but generally apply the interest as a monthly charge.

How do you access the funds from a line of credit?

Depending on the financial institution, you may be able to access your line of credit using a cheque, your online banking, your access card, over the phone or in person.

You can write a cheque to yourself and cash the funds, transfer money into another account using your online banking, speak to a representative at a branch, or use your debit card while making everyday purchases.

What are the requirements to get a line of credit?

Generally, financial institutions will require a small list of documents to apply.

These may include:

• Government-issued photo ID (driver’s licence)
• Proof of employment

Other considerations may include:

• Your income
• Your credit score
• Current levels of debt

The financial institution will likely check your credit score and credit history when reviewing your application.

You may also be required to book an appointment. When you do, make sure to ask if there are other requirements you need, so you don’t show up empty-handed.

Should you get that line of credit?

A line of credit can be great for the unexpected expenses you may incur or for paying down and consolidating debt. However, if mismanaged, accessing further credit can lead to trouble.

The pros and cons of lines of credit

Pros

1. Low-interest rates: They typically offer lower interest rates than other forms of credit.
2. Reusable: They can be reused without having to reapply.
3. Avoid fees: You may be able to avoid extra set-up charges or annual fees if you use your current financial institution.
4. Flexibility: Only pay interest on the amounts you borrow.
5. Accessible: Easily access cash anytime you need as long as you have available credit.

Cons

Although there are arguably fewer cons, they are significant factors in deciding to get a line of credit.

1. Variable interest rates: Interest rates can change from month to month.
2. Easy to misuse: For those that have difficulty managing credit, they can be far too easy to access and spend, creating further financial stress.

If you do decide to go ahead and accept the line of credit, be prepared to handle the new responsibility. Make sure you have a plan to pay it off because the money can be easy to spend, but much harder to pay back.