If you’re looking into increasing your FICO score or if you’re just curious about how a FICO score works, then you’ve likely come across the idea of lines of credit.
Lines of credit are an extremely important element when it comes to having a good credit score. Your credit score will help you with securing loans, being approved for credit cards, and many other things.
Your FICO score is considered a quick summary that explains how responsible you are with the money that has been loaned to you (regarding paying it back, paying it in full, and paying it on time), and as a summary of your person, it’s a very important one to have in good standing.
One of the ways to do this is to have multiple lines of healthy credit accounts.
Lines of Credit: A Summary
When it comes to lines of credit, they can come in many different forms, so it can be hard to know which one to use and when. Each form that a line of credit comes in will have its own distinctions, but, luckily, lines of credit can be used by individuals or by businesses.
However, they tend to be used in businesses situations rather than personal ones, so if you’re doing research, you’ll find that a lot of information about them is tailored in that direction.
A line of credit will provide a borrower (in this case, you or your business) with a limited amount of funds that you can tap into whenever you need. You will have to pay this money back, however (like with a credit card).
However, because you can use the money, withdraw money, and pay the money back on your own timeframe, it’s considered a flexible line of credit. Flexible lines of credit are, well… flexible, and they can be customized to your specific needs.
This makes them very attractive!
Credit Lines: The Types
There are, of course, many different types of credit lines, but we’ll be focusing on some of the biggest ones you’ll likely encounter.
Revolving Line of Credit vs. Non-Revolving Line of Credit
A revolving line of credit is the type you are most likely used to. Let’s say that you have a line of credit for $5,000. You spend $4,000 on a business expense (leaving only $1,000) in your credit line, but then you pay it back. You’re back up to $5,000 to use whenever you need.
A non-revolving line of credit works very similarly, however, in this situation where you have spent $4,000 (leaving only $1,000 in your credit line), that’s it. Even when you pay back that $4,000, you will still only have access to that remaining $1,000.
Secured Credit vs. Unsecured Credit
With unsecured loans, you will not be required to put up any sort of collateral or assets to try and prove your responsibility for the loan. Secured loans require you to put up assets or collateral when you take out the loan so that if you default, the credit card company can come for your home or whatever other assets you put up.
Personal Line of Credit
A personal line of credit will give you access to funds that can be borrowed, repaid, borrowed, repaid, etc. This is very similar to a revolving line of credit and a credit card.
Home Equity Line of Credit (HELOC)
HELOCs are a type of secured line of credit, and it involves your home payments. During the specified period of the loan, you’ll be able to access funds from your house payment, repay them, and borrow again.
You can basically use the value of your home to give you access to money, however again, you will have to pay it back within a specific timeframe.