Is a credit card a type of personal line of credit?

No, a credit card is different from a personal line of credit. While both allow you to access money based on a credit limit over time, a personal line of credit has a draw period, while you can continue to use credit cards as long as the account is open.

What credit score do you need to qualify for a personal line of credit?

An excellent credit score is necessary to qualify for a personal line of credit. That means you must have a score of 700 or higher.

Is it a good idea to have a personal line of credit?

If you need immediate access to money for unexpected expenses or ongoing projects like home renovations, a personal line of credit may be a good option. However, if there are other more inexpensive forms of credit available to you, then a personal line of credit may not be a good idea.

What’s the difference between a personal line of credit and a loan?

While a personal line of credit is a type of financing option, it is different from a traditional loan in the sense that the funds will not arrive in a lump sum. Instead, borrowers can access the funds anytime they need as long as they are within the draw period.

How do you pay back a line of credit?

You will need to make monthly payments, which include advances, interest and other fees. The minimum payment amount also depends on how much you take out.

Does opening a personal line of credit affect credit score?

A personal line of credit application may involve a hard credit inquiry, which will be recorded in your credit report. Repayments can also affect your score, with on-time payments helping with your creditworthiness and missed payments damaging your score.

Does having a line of credit affect mortgage approval?

Lenders consider your creditworthiness, income and existing debt when deciding whether a borrower can pay off a mortgage or not. A line of credit is a debt obligation, which lenders will evaluate to see if your income can cover all your expenses.

Should I get a personal line of credit if I don’t need it?

No, you should only get a personal line of credit if necessary. Remember that a personal line of credit is a loan product you will have to pay off.

What Is a Personal Line of Credit?

There are various options available to people who need immediate funds. One of these is a personal line of credit.

Generally, a personal line of credit is a financing option allowing borrowers instant access to a predetermined amount. You can withdraw funds as necessary, making it a good option to cover unexpected expenses. You can use the funds over time until you reach the set limit. Additionally, it comes with variable interest rates. You will only have to pay the interest rate of the money you used.

A personal line of credit may not be for everyone. Some individuals may not qualify since lenders and banks rely on credit scores, some individuals may not qualify. Typically, you would need an excellent credit score to get approved.

MoneyGeek breaks down what a personal line of credit is, how it works, its pros and cons, and how you can get one to help determine whether this financing option is right for you.

Key Takeaways

Personal lines of credit allow the borrower to withdraw funds whenever necessary until they hit their limit.

With a personal line of credit, borrowers only have to pay the interest rate for the money they used.

It is necessary to have an excellent credit score (not just good or fair) to qualify for a personal line of credit.

WHAT WE’RE GEEKING OUT ON

How Does a Personal Line of Credit Work?
Pros and Cons of Personal Credit Lines
How To Get a Personal Line of Credit
Frequently Asked Questions About Personal Lines of Credit

How Does a Personal Line of Credit Work?

Taking out a loan helps individuals deal with various expenses. However, not all loans are the same.

For instance, a line of credit does not give the borrower a lump sum. Instead, the borrower is given access to an approved amount over a draw period. To put it simply, a personal line of credit is a type of revolving credit that allows the borrower to tap into the funds multiple times.

To understand how this financing option works, you need to know three major terms. These are the draw period, interest accrual and interest rate type.

Major Terms

Draw Period

The draw period is the fixed timeframe when a borrower can take money from the loan fund.

Borrowers make monthly payments based on a minimum amount of interest depending on the lender. After repayment, the funds will be available again as long as the draw period has not yet ended.

In some cases, the borrower will have a continuous draw period. After this, their repayment period will start.

Interest Accrual

A personal line of credit is an unsecured loan. Collateral is not needed to borrow funds. That said, it comes with interest.

This financing option comes with interest accrual. The loan incurs interest, which is calculated on a specific date. Typically, interest accrues daily and is added to the monthly payment. The accrued interest is based on the rate and the principal loan amount.

Interest Rate Type

Usually, personal lines of credit come with variable interest rates. They are subject to change and are tied to the prime rate. The interest a borrower has to pay may fluctuate. Monthly payments are not fixed.

Because of this, it may be more challenging to predict monthly payments. That said, lenders inform borrowers in advance if there is a change in the interest rate.

Pros & Cons of Personal Lines of Credit

All types of credit have pros and cons. Before getting a personal line of credit, take some time to compare it with other financing options.

Weigh your situation and needs. Consider the advantages and disadvantages of each type of credit and see which one offers the most benefits to you.

Advantages of a Personal Line of Credit


Quick access to funds	A personal line of credit is a great option for individuals who need quick money. Funds will be available when you need them. The funds are easily accessible at any time during the draw period. Depending on the lender, you can qualify through different channels like a bank branch, online banking or a mobile application.
Flexible interest rates	Personal lines of credit can have lower rates than credit cards. That is because they depend on the borrower’s credit history and the lender. They may also be lower than the interest rates for traditional fixed-rate personal loans. In addition, interest rates are typically flexible. Since they follow prime rates, rates can decrease. That said, an increase in the interest rate is also possible.
No collateral requirement	As an unsecured loan, a personal line of credit does not require collateral. That means you do not have to risk your assets and properties. This also makes it ideal for those who do not have a home or vehicle they can use as collateral for a loan.
Pay for what you borrow	One of the advantages of a personal line of credit is that you only pay for the amount you withdraw, plus the interest. You do not have to pay anything unless funds are withdrawn. That means you can keep the money intact until you need it. However, be sure you take note of the draw period.

Different offers may be available to borrowers. These can vary depending on the lender and loan amount. In most cases, borrowers maintaining a large balance enjoy additional perks.

For instance, lenders may offer discounts to borrowers who opt for automatic payments. Some banks also offer lower interest rates to borrowers who use the bank for wealth management. You can check with your lender to see if you qualify for this kind of offer.

Disadvantages of a Personal Line of Credit


No tax benefits	While personal lines of credit may have lower interest rates, they are not tax-deductible. You cannot subtract the interest you pay on them from your taxes.
Difficult to qualify	Since there is no collateral requirement, lenders typically have strict qualifications for potential borrowers. Your credit score will play an important role in determining whether your loan application will get approved or not. Typically, you must have an excellent credit history or a score of 700 or higher. Otherwise, lenders will be less likely to grant you a personal line of credit. Lenders will also look at your income to determine the loan amount you can afford. Individuals with unstable or low income may not qualify for a personal line of credit.
Risk of overborrowing	It is important to remember that a personal line of credit is still a loan. You must repay the loan at the end of your draw period, plus interest. That means a repayment plan is necessary. Otherwise, paying can be a bit challenging. You may also risk over-borrowing. It’s wise to stick to a budget. Avoid splurging and only take out money from your credit line when needed.
Variable interest rates	While borrowers are only charged for the funds they have withdrawn, personal lines of credit accrue interest. Since interest rates are variable, they tend to fluctuate over time. Unlike fixed interest rates, your rates may change. Because of this, it can be a challenge to know exactly how much you will end up paying.

MONEYGEEK EXPERT TIP

Creditworthiness is an important factor that lenders consider when deciding whether to approve a personal line of credit application. To qualify, you must have excellent credit. That is because this type of financing option is unsecured. Lenders must make sure the borrower can pay for the loan amount plus interest.

If you don’t qualify because of your credit score, you can consider other loan options like a secured credit card, or a secured or unsecured personal loan.

How to Get a Personal Line of Credit

Getting a personal line of credit is as easy as getting a credit card. Once you are sure that you are eligible for a loan, you can proceed with the application.

The process may vary depending on the lender. But, in general, applications can be completed online, over the phone or in-office.

Evaluate your credit score

Find out whether your credit score qualifies for a personal line of credit. Typically, you need a score of 700 or higher and a solid credit history to qualify.

Set the amount you need

Consider your needs. How do you plan to use the money? Get a general idea of how much money you would need access to over time. This will help you avoid over-borrowing.

Research and compare lenders

The application process, interest rates, draw periods and fees may vary per lender. So, it’s smart to consider different lenders before applying for a personal loan of credit. Compare terms and rates. Shopping around can help you find the best deal.

Apply for a personal line of credit

Make sure you check the requirements of the lender you have chosen. In most cases, financing institutions evaluate income and credit scores. So, prepare your income and employment-related information.

Gain access to funds

If your application is approved, you will have access to the funds. Modes of accessing the loan amount depend on the lender. For example, some lenders give borrowers a card to access funds. Some release checks.

Frequently Asked Questions About Personal Lines of Credit

Understanding personal lines of credit can be tricky, especially for those who have never used them before. MoneyGeek answers some frequently asked questions that may help clarify some of your concerns.

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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