Debt & Credit Free
Lines of Credit, Mortgages, and Other Differences
What does “line of credit” mean? When homeowners sit down with a loan officer and discuss home equity, the first question the borrower will likely ask is how it works. The term line of credit has been defined more sharply in recent years. The federal regulators now prefer calling it a “line of credit” or “revolving line of credit.”
A line of credit allows the borrower to have access to funds, but only up to a certain limit. This is called an “automatic limit.” As you make credit card purchases or have revolving lines of credit, the bank will “revolving” the limit of your credit line.
Here is an example of how a line of credit might work. Let’s say that a borrower has an $8,000 line at a bank. In this example, the limit will depend on the borrower and the bank, but typically $8,000 is a good figure. Now, let’s say that the borrower refinancing his home at his hometown bank to consolidate the line. This would normally create a $24,000 line. However, as we have styles, banks will create a line of credit anywhere. So, when this borrower went to refinance, the bank did not have enough credit, and the loan officer was able to approve a $30,000 line of credit!
In this working scenario, the bank did not lose the entire $30,000, just the revolving credit limit. When this loan was finally paid off in about 9 years, his line of credit was clean. In many cases, this will happen in just several months.
Now, let’s discuss why this is an advantage. While credit cards used to have no limit, today, limitless credit is just as dangerous. Thousands of people got in trouble by signing up for thousands of forms of credit without fully understanding what depth is involved. As a result, their credit got shredded, and they got punished.
This can only lead to disaster. However, when I am asked about the pros of a line of credit, I began decimalizing credit options to show borrowers that they will only get hurt if they don’t fully understand credit and money matters.
The first advantage is having an open line of credit. It’s nearly impossible to make a purchase if you don’t have access to a line of credit. I prefer to say that this is a big plus, not a minus. I’m not talking about open lines of credit that can be used by almost anybody. However, this does not include things like secure loans such as homes and automobiles. If you do not have a secured line of credit, you will pay significantly more points and higher fees.
First and foremost, this rule of thumb is for you to have an open line of credit at a bank or lending institution, such as a credit union or a bank, or even a building society. That is what my definition of an open line of credit, line of credit is. When I say an open line of credit, I do not mean having it in your wallet. If you do not have an open line of credit, you cannot get a loan if there are no other alternative ways to access the money.
In closing, a line of credit is very valuable so if you are aware of its advantages; you will be able to take advantage of its benefits. My best piece of advice to anyone is to understand credit matters fully. You may not need a line of credit initially, but it will be very helpful to you when you need it.
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