Taking out a line of credit is a wonderful way to buy something that you might not necessarily have the money for upfront and then make smaller payments each month to pay it off. Lines of credit come in all different forms like credit cards, loans and secured lending. The most common line of credit is a credit card and most adults have at least one credit card out. These lines of credit make it easy for you to make purchases quickly and easily without needing the large amount of cash upfront. You can use credit cards for anything from car repairs to furniture and more.
Here are three essential things to understand about lines of credit:
1. You Can Only Borrow Up to Your Credit Limit
When you take out a line of credit, whether it be a credit card or loan, you are given a specific credit limit. This might be the amount that you requested or the amount that the lender deemed appropriate for your credit history and report. Your credit limit is the total amount that you are able to put onto that card or that is given to you via a loan. Let’s say that you have a credit limit of $2,000. You can make a purchase up to and including this amount. After, your card will be declined. Your credit limit goes back up after you have paid off the amount that you owe.
2. Minimum Payments Must be Made Each Month
Minimum payments are incredibly important because they allow you to pay off the amount that you owe on the credit line without your credit score taking a hit. The minimum payment is a small fraction of what you owe, so it makes it easy and quick to pay off. Keep in mind that interest is almost always included in this amount, unless you are in a promotional period that offers interest free purchases. By putting more than the minimum amount towards the card, you will find that it gets paid off a whole lot quicker than if you were making smaller payments. Also, remember that if you fail to make minimum payments each month, your credit score can and will eventually take a hit for failure to pay off credit.
3. You Don’t Always Need Good Credit to Obtain a Line of Credit
Some people assume that taking out a credit card is only meant for individuals with good to excellent credit scores. While it’s true that these individuals have an easier time obtaining credit, this doesn’t mean that those with fair and even poor credit won’t be approved. As long as you have a relatively stable credit history, you should be able to get approved for credit. The only thing you might notice is that your interest rate is slightly higher or your credit limit is not as high as it would be if you had better credit.
Taking out a line of credit is essential for those difficult purchases that just need to be done. As a general rule, it is important to only use the card when there is an emergency and to avoid frivolous spending on it. For this reason, a lot of people take out store-specific credit cards, like one with a local mechanic shop or a furniture store when they need to purchase a living room or bedroom set. By taking out a store-specific card, you will be less likely to use it at any other time than when you are in that store.
It is crucial that you learn about the card you’re taking out and ask about any promotional periods that the lender has available. For instance, some cards offer a no interest period if the card is paid off in the first 6 to 12 months. This gives you this period of time to get that card paid off and to ensure that you are not being hit with any type of interest in the process. You will find that having a line of credit makes life just a little easier, but avoid taking out too many credit cards as they can become overwhelming to pay at once.