The Lines Of Credit Work

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ow Lines of Credit Work Hopefully the following will help the reader (you!) have a better understanding of Lines of Credit (LOCs) before applying for them. Quick Abbreviation guide: LOC: Line of Credit CC: Credit card FI: Financial Institution (i.e. bank; credit union) FA: Financial Advisor Introduction First tip: You only get charged interest when you use your LOC. Most LOCs will not have annual fees (like some "special" credit cards do - ie. one with "points" and/or other perks). So you can have a LOC and leave it "dormant" - not use it for years (unlike bank accounts and credit cards which may get automatically closed if you don 't use them at least once a year). Most people that are "credit conscious" will only use them for bigger…show more content…
Secured vs Unsecured Lines of Credit There are 2 types: secured (attached to collateral or an asset such as a home) and unsecured (which is a "stand-alone" account). Secured Lines of Credit usually have lower interest rates (typically Bank Prime plus 1% - depending on the FI). However, if you miss a mortgage payment and/or a Line of Credit Payment, both accounts get effected and thus, it hurts your credit score. Basically you are using the available equity (the value of your home vs home much of your mortgage you have paid down) on your home to secure it. Unsecured Lines of Credit are usually higher in interest and financial institutions determine what the rate will be: Bank Prime plus "something". For example, bank prime might be 3% (when the federal rates are 1% - usually in a low performing economy). The Plus "something" would depend on your credit rating (which you would find out once you do the credit check). What is the lowest or highest limit allowed when applying for a LOC? It depends on the financial institution. Some institutions have a minimum limit of $10,000 for LOCs, where CCs could be as low as $500 depending on the CC type and at the discretion of the FI. The highest limit again is at the discretion of the bank and how much they consider you as a credit "risk". Some FIs allow for a $40,000 to $50,000 maximum limit. Credit Cards vs Lines of Credit Lines of Credit are more similar to loans. Having said that, both CCs and LOCs are similar
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