Understanding How Lines of Credit Work

Mortgages, credit cards, lines of credit, and car loans are just a few of the many different types of loans lenders offer to consumers they feel will repay them in a timely and appropriate manner. Most of them are easy to understand, but there are always a few questions surrounding lines of credit. What are they? How do they work? Do they really benefit you when you are looking to raise your credit score? If you’re not entirely sure what a line or credit is or how it works, this information can prove quite helpful.
What is a line of credit?

A line of credit is best described as similar to a credit card. It’s credit issued by a bank to a consumer with a preset limit. For example, you might qualify for a line of credit up to $10,000. This money must be repaid to the lender over a period of time predetermined by the lender. Some lines of credit have a longer repayment term, and others are short-term side. It all depends on the type of credit you choose.

Like a credit card, you can spend as much as you want up to the limit and repay it over time. You may always repay the loan in full every month, or you can choose to pay it off a little at a time so long as you always pay at least the minimum payment. You may continue using the line of credit as long as it is open, but you must pay it in full by the final due date.

What are the requirements for a line of credit?

Most lenders want someone who has good credit, but some lenders are willing to issue lines of credit to those with damaged credit. It all depends on the lender. The basic line of credit requirements include the following:

– A source of income to prove your ability to repay this type of loan
– Collateral such as your home or vehicle
– A minimum credit score determined by the lender

If you cannot prove that you work and pull in a decent income or you choose a loan that requires collateral, you’re probably not qualified to borrow. Not all lines of credit are secured, but those are the ones with the best interest rates. If you’re not approved for a loan at one bank because of your credit score, there is a chance you might be approved elsewhere (learn more here). Every lender is different.

Do your homework prior to applying for a line of credit. Know your credit score and choose lenders who work with borrowers in that range. If you’re applying for a loan, know what kind of repayment terms you’re getting into, the cost of the loan with interest, and make sure you have a good reason for using this money. Responsible borrowing is what helps you raise your credit score.

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