Good Morning Everyone! It’s time for another post in our Fun Financial Tools for Twenty-Something’s series. Today we are going to discuss the many advantages of a Line of Credit which include flexible repayment options, lower interest rates, as well as affordable monthly payments. When we are young and new to personal finance we are usually very eager to apply for our first credit card or Line of Credit. However, if we are not careful and financially responsible we could get caught in the revolving credit door.
A Line of Credit is a revolving credit product. This means that as we pay off the balancing owing on our line of credit, it becomes available for us to use again. Our Line of Credit is approved for a certain amount, and similar to a credit card the balance starts at 0. As we use our Line of Credit the balance increases and we start accumulating interest. A Line of Credit can be a very useful product to help us build and maintain a solid credit score. However, if we don’t manage our money wisely the option of revolving credit can be very damaging to our credit history because balances can accumulate very quickly.
The Benefits of a Line of Credit
Whether we are still students or we are young professionals, there are several benefits to having a Line of Credit. One major benefit of having a Line of Credit over a credit card is the flexible payment option. We can choose to repay interest only while we are still in school, and delay repaying the capital amount borrowed until after graduation.
Credit cards do not allow this flexible payment option. Every month we are required to make at least the minimum payment on our credit card. This minimum payment is blended and includes both a portion of our capital as well as our interest. Our minimum monthly credit card payment is based on our average daily balance during the billing cycle.
A second major advantage of a Line of Credit is the flexible usage and easy accessibility. A fixed rate term loan, otherwise known as a personal loan, can usually only be approved for a specific reason such as attending college, buying a car, or debt consolidation. However, a Line of Credit can be used for any purpose and to buy anything. A Personal Loan is approved for a fixed number of years. Once the amount is paid off we no longer own the credit. A Line of Credit is revolving and exists indefinitely until we choose to close it.
Our Line of Credit is easily accessible with a simple transfer from our Line of Credit to our checking or savings account. Some financial institutions even offer Line of Credit cheques that we can provide as a form of payment.
Line of Credit Interest Rates
The Interest Rates on a Line of Credit are significantly lower than credit cards and personal term loans. Our Line of Credit Interest Rate depends on our credit score and it is calculated starting with Prime Rate as a base. As an example someone with a really great credit score may be approved for a Prime +2% Line of Credit Interest Rate, while someone with a not so great credit score could be approved for a Prime +4% Line of Credit Interest Rate.
As you may have guessed the Interest Rate on a Line of Credit is variable. This means that as Prime Rate fluctuates so will our Line of Credit Interest Rate as well as our payments.
I have used my Line of Credit for everything from taking a vacation to investing in my retirement savings plan. I have even used my Line of Credit as my “in case of an emergency fund”. I like knowing that if I don’t use my Line of Credit I don’t pay any interest. I also like knowing that it is always available in case I do need to use it.
Here are the other posts in our Fun Financial Tools for Twenty-something’s series:
Account Balance Are Just a Click Away with Online Banking
The Advantages and Benefits of Online Shopping
Photo by Joe Shalbotnik
Tahnya is 30 years old and lives in Montreal Quebec. She graduated in 2005 from Concordia University, and she currently works for a major International Financial Institution. She recently launched http://www.mediamadam.ca/. You can follow her on Twitter @TahnyaP.