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Line of Credit

A line of credit is a pre-established amount of credit extended to a borrower by a lender that the borrower can draw against as needed. There usually aren’t any rules that dictate how the borrower can or should use the line of credit however the line should never be used frivolously. An individual can apply for and receive a line of credit and so can a business.

There are several ways a line of credit differs from a loan. First of all, the line of credit application process is simpler and approval usually takes days rather than weeks. When you obtain a loan, you are given a lump sum of money. With a line of credit, you have a maximum amount of money (or credit) available to you, but you use only what you need.

If you max out your line of credit, you start paying down the principle and that amount becomes available to use again. You can continue this spending and repayment cycle until the pre-negotiated term on the line of credit expires.

With a loan, repayment is made in installments meaning that you’ll make equal monthly payments throughout the entire loan term. With a line of credit, you have more flexibility in how much you repay each month. Sometimes, you may only be required to repay the interest each month.

It’s a good idea to put some thought into why you need a line of credit. Many need the funds to make home improvements so they apply for a home equity line of credit. Those who issue home equity lines typically set them up as secured meaning that the equity in the home is used as collateral. Having collateral reduces the risk to the lender and usually means more favorable terms. A business owner might rely on the line of credit to help make it through slow times during the year or to purchase necessary equipment.

If you decide to apply for a line of credit, you’ll be making a smart move if you shop around. You’ll find different interest rates and repayment schedules being offered by lenders. Some lines of credit need to be secured while others don’t. As a general rule, the better your credit history, the more favorable the terms you’ll be offered.

Also consider finding out about any line of credit being offered at the financial institution where you conduct your personal or business banking. As an established customer, you might get better terms and an expedited application process.
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