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How To Use A Line Of Credit And Make The Most Out Of It

Learning how to use a line of credit will allow you to take advantage of it to its full potential. Needless to say, knowing how to use it properly will protect you from making regretful decisions in the future.

how to use a line of credit

In a report published by Experian, it says that “consumer debt in the U.S. has grown 19% since 2009 to its current record high of $14.1 trillion.” Furthermore, it says that while debt in aggregate increased, the same happened to the totals in almost every debt category — with some doubling even.

Based on the same report, mortgage loans remain to be on top of the list with an all-time high record of $9.6 trillion. Next on the list are auto loans, student loans (which doubled in number), as well as credit card debt, and home equity lines of credit (which is a type of line of credit) with balances total to $420 billion. Following on the list are personal loans and retail credit card debt.

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Although compared to other debt types, the report says that “HELOCs have increased by at least double-digit percentages in the past decade.

There could be a lot of reasons or factors to consider for the increase, but one thing’s for sure, more and more people are getting lines of credit. We thought, perhaps one of the reasons why is the fact that a line of credit has a lower interest as compared to credit cards, which is its major competitor as they function almost the same. Another reason could be the flexibility, as well as the fact that like personal loans, you can basically use it for almost anything.

While there are so many reasons to like about lines of credit, we highly recommend that before you even get into one, you better learn and understand how it actually works, and how to effectively use it.

As borrowers, it is our responsibility (we owe it to ourselves, anyway) to be knowledgeable about things (in this case, about lines of credit) before we even get into it — After all, the last thing we want is to get into trouble or to regret our decisions, right?

So, if you want to know more about the line of credit and how to use a line of credit, then this one’s for you.

In particular, we are going to share with you some of the most asked questions regarding lines of credit, which include the following:

  • What is a personal line of credit?
  • How does a line of credit work?
  • What are the different types of lines of credit?
  • How to use a line of credit?
  • How to apply for a line of credit?
  • Where to get a line of credit?

WHAT IS A LINE OF CREDIT?

A line of credit or simply a line of credit refers to a type of loan that is similar to a credit card in the sense that a borrower has a specific loan amount of money that is comparable to a credit card limit. That money can be used for any purpose, as needed.

Similar to personal loans, generally, lines of credit are unsecured, which means a borrower does not need collateral to get one. However, just like any other unsecured loans, most likely a borrower must have at least 700 credit scores plus a good history of repaying debts to ensure approval.

Just like personal loans and credit cards, a line of credit can be used for almost anything like home renovations, vacation, purchasing expensive furniture, as well as paying for medical bills and educational fees.

While you can spend your line of credit for almost anything you want, it is important to note that you must not exceed the approved line of credit or you might just be in trouble paying the loan off.

A line of credit, like any other type of loan, does have its share of highs and lows. It has its own set of risks, which could really end up costing a good amount of money if not handled well. Meanwhile, one of the major good things about it is that borrowers do not get charged for any unused amount.

HOW DOES A LINE OF CREDIT WORK?

Now that you already know what a line of credit is all about, let’s talk about how it actually works.

Unlike a typical loan or other types of loans, a line of credit gives borrowers access to a set amount of money that they can borrow or use when the need arises. What is good about is that you do not pay any interest until the borrower actually uses the money.

Lines of credit are available both for personal and business use, which makes it also a good choice among business owners when they need some financial backup.

With regards to personal lines of credit though, they are usually unsecured. As mentioned earlier, unsecured loans mean collateral is not needed to ensure the approval of the loan. However, having a good or excellent credit score is required.

Depending on the lending company, some lines of credit come with fees like annual fees, and there are limitations set when it comes to the amount of money you can borrow.

Once you have qualified for a line of credit, what happens is that you will have a set time frame, which is also known as “draw period”. During this time, you can draw money from the account. The draw period can last up to several years depending on the lender.

Again, depending on the lending company or financial institution, you may be issued with special checks or a card to use, or the company may transfer the money you need to your checking account once you are ready to borrow money. It’s best to check with your desired lending company first before getting one.

Moreover, as mentioned, you won’t be charged for any interest until you actually borrow money from your line of credit. Once you did, the interest will begin to accrue, and you will then have to pay at least the minimum payments required. Once you pay, the amount will be added back to your line of credit.

However, once your draw period ends, you will have to enter the repayment period, which means you will have a set time to repay the remaining balance.

While making payment at a minimum looks like a good option, please know that you actually are paying more by doing so. Thus, we highly recommend paying off what you need to pay off in time to avoid wasting money.

WHAT ARE THE DIFFERENT TYPES OF LINES OF CREDIT?

Before we even talk about how to use a line of credit, another important thing that you should know is the different types of lines of credit.

Yes, there are a few of them, which include:

  • Personal Lines of Credit
  • Business Lines of Credit
  • Home Equity Line of Credit (HELOC)

Now, allow us to tell you more about each type —

Personal Lines of Credit

Personal lines of credit basically allow any individual borrowers to use the money for any personal expenses like big purchases, home repairs, vacation, medical bills, weddings, and other significant life events, and others. A personal line of credit may also be used to consolidate higher-interest debts.

If you want to learn how to use a personal line of credit per se, here’s a very informative video by MonkeySee:

Business Lines of Credit

Obviously, this type of line of credit is designed for businesses. A business line of credit can be useful to get a business off the ground. This can be used to fund business-related expenses like paying vendors, payroll, paying tax bills, as well as in purchasing inventory.

A line of credit may also be helpful for those businesses that are just starting out as it can be used to create a more consistent cash flow, which can cover unexpected expenses.

Home Equity Line of Credit (HELOC)

HELOC is actually a popular type of line of credit especially for those whose home is worth more than their mortgage.

Unlike personal lines of credit though, HELOC is secured. Your home automatically becomes collateral. Since it is a secured loan, the line of credit is usually higher, and the interest rates lower. Also, borrowers may also gain tax benefits if HELOC is used to fund home improvements.

HOW TO USE A LINE OF CREDIT?

While we can run down a long list of how to use a line of credit, we’d rather provide you with some of the most significant tips on how you can make the most out of this type of financing.

First, plan ahead of time. As part of the planning process, you must see to it that the money you will get from a line of credit will only be used for significant purchases. Do not get a line of credit for small purchases. It’s not worth it. Instead of a line of credit, better use your savings for small purchases.

Second, shop and compare. We thought this one’s a very important tip. When opting to use a line of credit for certain expenses, make sure to shop around first and compare before settling for a specific lender. Doing so will allow you to choose the best deal possible.

Third, know and understand the terms of the agreement. When we say terms of the agreement, this includes knowing and understanding draw periods, when you have access to the money, as well as making interest-only payments.

Lastly, make early payments as much as possible. By making early payments, you get to cut down on future interest payments. But of course, ideally, you pay off whatever amount you used as soon as you can. That way, you can save a couple of bucks as compared to just paying the interest or the minimum amount required.

HOW TO APPLY FOR A LINE OF CREDIT?

Similar to other types of loans, to be able to get a line of credit, you have to look for a lending company or financial institution that fits best your requirements, and then, apply.

As usual, prior to giving approval for a line of credit, the lending company will assess and examine your creditworthiness. Generally, this will be based on your credit history, as well as your income.

Just like in any other type of loan, proving your creditworthiness is the most crucial part, but if you do have a really good record, plus you have a stable job with a good income, then, this should not bother you at all.

As soon as the lender gets to assess that you are worthy of a line of credit approval, then, funds will immediately be released (the number of days that will take before you receive the funds will depend on the lender).

Meanwhile, while preparing your application for a line of credit, consider taking the following steps to ensure approval of your loan application:

  • Review your credit report with all major credit bureaus through AnnualCreditReport.com.
  • Make sure to complete and/or update your financial record including your taxes, mortgage payments, etc. Also, make sure you have all your licenses as well as permits, and if you are registered correctly with both the local and federal governments.
  • Compare rates and other important loan details among lenders to ensure you get the best rate possible.

WHERE TO GET A LINE OF CREDIT?

At this point, you already know what a line of credit is, how it works, what you need to get approved of it, and of course, how to use a line of credit.

The next thing you need is where to actually apply for a line of credit.

One thing’s for sure – there are a lot of options out there. There are a lot of lenders providing a line of credit options.

Today, though, we are going to provide you with some of the industry’s best. This includes:

  • Wells Fargo
  • SunTrust
  • Bank of America
  • OnDeck
  • Navy Federal

Wells Fargo

Wells Fargo is one of the most popular banks in the country. Yes, it does offer lines of credit along with its other loan products.

At Wells Fargo, the bank provides lines of credit amounting from $3,000 up to $100,000, which makes it ideal for borrowers who need more line of credit.

When it comes to rates, the bank has very competitive rates that range from 9.50% up to 21% APR. Based on the record, at least 15% of the bank’s approved applicants qualify for the lowest rate available.

While the bank does not charge a balance transfer fee or cash advance fee, it does charge borrowers with a $25 annual fee.

If interested, you may apply online and get a reply soonest.

SunTrust

SunTrust is also a very popular financial institution in the country, and yes, they do offer a revolving line of credit, too.

At SunTrust, they provide a line of credit that amounts up to $250,000, and can even go as high as $500,000 for Private Wealth Management clients.

The lending company does not require collateral, and it does not charge application or annual fees as well.

However, the borrower must meet the minimum asset requirements, which amounts to at least $100,000.

Furthermore, SunTrust gives a 0.25% interest rate discount to those who pay through automatic deduction from a SunTrust account.

Similar to Wells Fargo, interested applicants may apply for a line of credit online, too. Expect that a decision is made within just a few minutes.

Bank of America

Bank of America is actually the best choice when it comes to HELOCs. The bank offers a low and very competitive home equity line of credit plus it provides several other benefits to borrowers.

The bank offers a special intro APR at only 1.74% for the first 12 months. Eventually, the rate increases to 3.65%, which still is very competitive.

Furthermore, Bank of America does not charge application, annual and closing fees, or any other additional costs as if a borrower wants to convert a variable-rate balance to a fixed-rate loan.

Also included among the perks it provides is that once an initial withdrawal is made when you open your account, you will automatically get a 0.10% discount for every $10,000 withdrawn.

OnDeck

OnDeck line of credit is ideal for small businesses. The lending company charges APR that starts from 10.99%, and borrowers can apply for a line of credit that could go as high as $100,000.

Such amount is very flexible and could cover various small business financing needs, which include bridging short-term cash flow setbacks, as well as financing growth opportunities.

Furthermore, what’s nice about OnDeck’s line of credit is that it does not charge any fees. More so, the company’s online application process may be done in as fast as 10 minutes.

Navy Federal

One thing we like about Navy Federal Credit Union is the fact that it allows HELOC borrowers to borrow money up to 95% of their property’s equity with a 20-year draw period, and a 20-year repayment period.

Navy Federal, similar to other lending companies in our list, does not charge any origination, application, annual, or inactivity fees as well.

Another thing to like about Navy Federal HELOC is that it offers a 0.25% rate reduction for borrowers who opt for automatic payments. Furthermore, the credit union will also handle most of the closing costs, which include settlement, notary fees, as well as a title search.

FINAL THOUGHTS ON HOW TO USE A LINE OF CREDIT

When it comes to financing needs, there is no such thing as one size fits all. That is why there are a lot of options available out there.

Line of credit, in particular, though is a good option if a borrower is going through challenging times – struggling in paying off bills, as well as a short-term dip in income. It is also ideal for those who have small businesses and need funds to help keep it going, to finance improvements, or even to start anew.

The line of credit is very flexible compared to other types of loans. It can be used for almost any purpose. Needless to say, it only accrues interest for the amount used.

Is it the right one for you? Well, if your needs fall under what we have discussed, then, the answer could be a yes.

Just keep in mind the tips we share on how to use a line of credit and you will surely be guided to ensure you do not use this type of loan for the wrong reasons.

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Investment Apps and Websites

7 Best Personal Lines of Credit In 2020

If you are looking into getting a personal line of credit, it’s best to shop around for the best personal lines of credit. By doing so, you are ensured that you have funds when you needed it most, at the same time, you get to enjoy both flexibility and lower interest rates as compared to credit cards.

Best Personal Lines of Credit  in the U.S.

In a report published by Statista, it is indicated that from 2000 to 2019, the total consumer credit outstanding in the United States amounted to approximately $4.11 trillion.

A huge number, right? Well, that’s the reality of debt in the country.

Unfortunately, a lot of people are in debt, paying off their debt, while some are in the process of borrowing money from financial institutions or lending companies.

Just so you know, there are several ways to borrow money. There are a number of types of lending money, and one of them is through persona lines of credit.

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There are a lot of financial institutions or lending companies that offer personal lines of credit, and to be honest, with so many options around, it’s definitely is just about choosing the best personal lines of credit.

Having said that, today, we are going to share with you some of the best personal lines of credit present in the market today.

But before that, we’ll share a few important information about personal lines of credit first just to refresh your memory (in case you have forgotten or for the information of those who are not familiar with this type of loan).

WHAT IS A PERSONAL LINE OF CREDIT?

According to Debt.org, America’s Debt Help Organization, a personal line of credit refers to “bank loan that closely resembles a credit card in the sense that you have a specific loan amount of money (comparable to a credit card limit) that you can use for any purpose, as needed.”

Generally, a personal line of credit is an unsecured loan. Thus, it is common among lending companies to require borrowers to have at least 700 credit score. More so, to have a good history of repaying debts.

A personal line of credit is quite similar to personal loans as it can be used for almost anything such as paying medical bills, buying home furniture, fund your dream vacation, or help a child pay for his or her college tuition. Mostly, however, a personal line of credit is used for home remodeling projects. But again, as we have said, just like personal loans, you can also a personal line of credit pretty much for anything and everything you can think of.

Just like any other types of loans though, personal lines of credit do have its risks as well. It can cost you a good deal if you do no handle the money and the privilege that come with it correctly.

Meanwhile, what’s nice about having a personal line of credit is that you can use it for anything and that no interest is charged on any unused amount.

WHERE CAN YOU USE A PERSONAL LINE OF CREDIT?

As mentioned, you can basically use it for anything. The important thing with a line of credit is to not fail in repaying the funds or you might just face a big financial problem.

Anyway, for your reference, here are some examples of where you can use a personal line of credit:

  • Emergency Situations
  • Medical Needs
  • Business Opportunities
  • Overdraft Protection
  • Home Improvements
  • Travel/Vacation
  • Irregular Income

It is important to take note though that rates and repayment options differ depending on certain factors like how much you owe, and your credit score. The better your credit score is, for example, the lower your interest rate would be — pretty much like a general rule in lending money.

HOW TO GET A PERSONAL LINE OF CREDIT?

Just like any other type of loan, you can get a personal line of credit at any financial institution or lending company. Of course, to be sure, it’s always best to check with the company first.

As we mentioned earlier, the best personal lines of credit are those that come with lower interest rates as compare to credit cards, and those with that comes with flexibility — in terms of repayment.

Another thing that most people like about personal lines of credit is that most of them offer variable access to cash instead of a lump-sum, single-purpose loan.

As stated in Debt.org, a personal line of credit “allows you to borrow in increments, repay it and borrow again as long as the line remains open.

What makes it different from a typical loan though is that the borrower is required to pay interest on borrowed balance while the line is open for borrowing.

If you want to know more on how to get a personal line of credit, check this very informative video by Denzel Napoleon Rodriguez:

The application process as well as the requirements to qualify for a personal line of credit vary from one lending company to another. That is why we highly recommend checking the company you are eyeing for.

But just to give you an idea, the common requirements include:

  • A good credit history (usually 700 and above; at the very least 680)
  • Must be of legal age
  • A citizen or a resident of the United States
  • Current employment record
  • Valid identification card
  • Social Security number
  • Other personal details

Again, we reiterate that it’s best to check the lending company first to be sure of the requirements.

WHAT IS THE DIFFERENCE BETWEEN A CONSUMER LOAN AND A LINE OF CREDIT?

Some people usually confuse the one with the other. So, before we proceed with our list of best personal lines of credit, here’s what makes a consumer loan different from a line of credit.

With consumer loans, normally, the whole loan amount is dispensed once the loan closes. The borrowers pay off the principal amount plus interest incurred in installment until the entire amount is repaid.

Meanwhile, lines of credit allow you to choose to use only a part of the entire available credit, or in some cases, none at all. The amount you pay as well as the interest will only be based on the portion used. Also, you can pull out the money anytime the need arises. It’s more like a credit card sans the big interest rate.

You see, both are entirely different things especially when it comes to how you use the funds. It’s probably safe to say that a line of credit is ideal for people who prefer having funds on standby so they can only use it when the need arises.

BEST PERSONAL LINES OF CREDIT

So, now that you already know or have already refreshed your memory about what a personal line of credit is all about, let’s proceed to the real deal – our list of some of the best personal lines of credit in town.

Our list include the following:

  • US Bank
  • Wells Fargo
  • PNC Bank
  • Regions Bank
  • SunTrust
  • Citibank
  • HSBC

Before we discuss them one by one, here’s a quick glance for your reference:

LENDING COMPANY MAXIMUM LOANABLE AMOUNT ANNUAL PERCENTAGE RATE (APR)
US Bank $20,000 As low as 10.25%
Wells Fargo $100,000 As low as 5.24%
PNC Bank $25,000 Varies by zip code
Regions Bank $100,000 As low as 5.25%
SunTrust $5,000,000 As low as 4.75%
Citibank $25,000 As low as 8.24%
HSBC $25,000 As low as 7.49%

US BANK

US Bank offers a one of a kind Reserve line of credit that helps protect your US Bank checking account from any accidental overdrafts. This particular product is in addition to the bank’s traditional line of credit offering.

Customers may want to take advantage of the US Bank’s personal line of credit. It comes with no annual fee, which makes it an ideal option for those in need of funds. Additionally, any time you checking balance falls below $0 balance, the bank will automatically transfer funds from your line of credit ensuring you have money as needed. Definitely a good thing as it keeps your mind at peace — free of worries and hassle as well.

Currently, customers can enjoy a variable annual percentage rate (APR) set at 11.75%, which is above average for customers with good to excellent credit score or history.

Furthermore, US Bank also offers flexible access to your funds by issuing borrowers with a Visa Access Card and personal checks — apart of course from being able to draw online or through the bank’s mobile app or in-person through by visiting one of their branches near you.

Unfortunately, the US Bank’s personal lines of credit are only limited to current bank customers. Also, another downside of the US Bank is that it does not disclose draw as well as repayment periods online.

Having said all that, we got to say that if you are looking for a personal line of credit with great overdraft protection, then this one’s for you.

WELLS FARGO

We must say that Wells Fargo does have the best personal line of credit option when it comes to funding home improvements. It is ideal for new homeowners who lack home equity.

Wells Fargo offers one of the highest borrowing caps on both secured and unsecured lines of credit. They’re at $250,000 and $100,000, respectively.

With Wells Fargo, borrowers can get their credit lines with savings or certificate of deposit accounts. This will net them with the most competitive rates. Also, borrowers with good to excellent credit will get a decent 10.5% variable for an unsecured line of credit.

Wells Fargo’s personal line of credit has no origination fee. Although it has an annual fee, it’s very minimal at $25 per year. The annual fee is intended to keep the line of credit open.

PNC BANK

PNC Bank’s personal line of credit is definitely the best for day-to-day expenses.

Currently, the bank offers up to $25,000 worth or personal line of credit with no collateral required.

Just like the previous banks we mentioned, PNC Bank hardly charges as well. In fact, if you wish to end your line of credit, you may definitely do so anytime without having to worry about getting charged with prepayment.

More so, PNC allows withdrawal of funds for as little as $50 whenever and wherever you need it.

Unlike other banks or financial institutions, PNC Bank approves credit lines that are as low as $1,000. This gives borrowers’ flexibility to cover monthly expenses should cash flow issues rise up throughout the whole month,

Combining all the features of the PNC Bank’s personal line of credit, it’s no doubt is the best line of credit to cover a borrower’s day-to-day expenses quickly.

REGIONS BANK

For us, we find Regions Bank as the best when it comes to secured personal lines of credit.

It comes with low APRs, as well as flexible terms, and wide accessibility. Furthermore, Regions bank has the tightest APR range as compared to other banks that offer secured personal line of credit. Currently, Regions Bank APR ranges between 7.5% and 8.5%.

In addition, Regions’ personal line of credit also allows you to make renewals of your credit line yearly. Don’t worry because it’s nice knowing that there are no limits on the number of renewals, which means you can use it as long as you need it.

With as little as $250, you can already open a secured credit line. The maximum amount allowed is $100,000.

What we also like about Regions’ personal line of credit is that you are given the option to secure your line of credit with the bank’s CD account, money market account, or savings account.

Borrowers can have so much confidence with Regions Bank as it has obtained a very attractive A+ rating with the Better Business Bureau.

Also, unlike other banks, which are exclusive for US citizens and/or residents only, Regions Bank also allows applications of the line of credit from non-U.S. citizens.

Regions Bank’s annual account fee only costs $50 yearly, which gives you access to an amazing line of credit without breaking the bank — without having to worry about getting charged for an expensive account fee.

Unfortunately, those borrowers who live outside Regions’ 15 states of influence may find it challenging to obtain a credit line because they are required to process application in-person.

SUNTRUST

SunTrust is ideal for people who are going to spend a large amount of money.

SunTrust offers two lines of credit. However, its Select Credit Line is the only one that is secured. This special revolving line of credit is primarily offered to the bank’s Premier clients.

With the bank’s personal line of credit, you can borrow as much as $5 million. SO, now you understand what we mean by it being an ideal choice for large spending.

Anyway, SunTrust’s variable rates start for as little as $5, which includes the auto-pay discount.

To be eligible for SunTrust’s personal line of credit, you have to meet certain requirements, which include having a SunTrust Bank investment account with at least $100,000. This acts as collateral for the line of credit.

Remember, just like any secured loans out there, a secured personal line of credit requires collateral.

Like the rest of the banks beforehand, SunTrust does not charge an application fee as well. In addition, it also does not charge annual fees. More so, qualifying account holders can choose an interest-only repayment option for a limited period of time.

CITIBANK

Of course, also included in our list of some of the country’s best personal lines of credit is Citibank.

We thought Citibank is the best bank when it comes to the flexibility of its personal line of credit product.

With the bank’s flexible financing options, its custom line of credit makes money management even easier and more manageable.

While the bank charges a low annual fee, which is $50, it does not charge anything for cash advances. By the way, the annual fee can also be waived if the borrower makes a payment of takes a loan at least once during the whole year.

Additionally, Citibank does have a feature wherein borrowers are allowed to convert balances between variable and fixed rates as they see fit. You see, these simple yet very helpful features are the reason why we tagged Citibank as the best personal line of credit choice when it comes to flexibility.

HSBC

If you are looking for excellent credit, the best option would be HSBC.

Apart from providing a line of credit without an annual fee, it also comes with a 45-day introductory annual percentage rate (APR) at 7.49%.

Yes, that is definitely low as compared to other lenders we have on our list.

Furthermore, HSBC also provides borrowers a free FICO credit score statement every month to help their customers keep their finances on track.

Unfortunately, though, you must be a current HSBC member to qualify for this product. Also, another downside of this product is that it comes with high late and returned payment fees.

FINAL THOUGHTS ON BEST PERSONAL LINES OF CREDIT

A persona line of credit is ideal for people who need standby funds or as the need arises but does want to spare themselves from applying for loans over and over. Also, for people who want to experience the same convenience that credit cards give, but wants to stay away from high-interest rates.

It’s actually nice knowing that loan products like persona lines of credit do exist. It gives borrowers more options to choose from – depending on what they need and what they are capable of.

Have you tried getting a personal line of credit yet?

If you are looking into getting one, make sure you only get from one of the best personal lines of credit available so you get to enjoy certain features and privileges.