A line of credit is a flexible loan that usually gives you a defined amount of money that you can use as needed. Interest will be charged when you borrow the money and it can be used to cover gaps if you have an irregular income or if you want to finance a project that you know you cannot cover the cost of, right away.
What are the Benefits of a Credit Card?
There are many benefits that come with using a credit card. Some of them include the fact that they are convenient, as you can buy something immediately and delay paying the true cost. You can also spread the cost of your investment. You can pay in several, smaller monthly instalments and this is ideal if you want to budget. Lastly, a credit card gives you the chance to boost your credit rating significantly. If you use a credit card responsibly, then your lender will notice this, and they will improve your credit score as a result. if you have a low credit rating then you can also take out a credit builder card. This will help you to drastically improve your score.
How does HELOC Work?
If you know how a standard credit card works, then you will be glad to know that HELOC works in a very similar way. With a credit card, the bank will give you a credit limit and this will be based on your household income, your assets and your credit score. During each cycle, you have the freedom to spend as much as you want, or as little as you want. You just need to make sure that you stay under the limit. HELOC however is based on how much equity you have in your property. You will have a draw period, and this can last between five and ten years. This determines how long you will have access to the funds, and then a credit limit. You will also have a repayment period, which is usually between ten and twenty years after. You cannot access money during this time, but you will pay your outstanding balance with interest.
HELOC VS Credit Cards
HELOC are subject to various underwriting standards from a lender. This means that you have to show your employment status and your income, as you would if you were refinancing your home. HELOC is also secured against your home. If you do not repay, then you may find that you end up in foreclosure. A credit card is unsecured, so you are not likely to lose your home if you do not pay.
When is Credit Useful?
Lines of credit are not usually suitable if you want to finance a one-time purchase, such as a house or a car. This is why a mortgage is useful, or an auto loan. Through lines of credit, you can easily acquire items that a bank would not underwrite a loan for. Individual lines of credit are intended to help you smooth out your monthly income and it also gives you the chance to finance projects that would otherwise have been difficult.
If you are self-employed then you may find that you have an irregular income and that you also have delays when you are performing work or collecting pay. You could use a credit card when dealing with the cash flow crunch here, giving you the chance to adopt a flexible payment schedule.
Repeated Cash Outlays
Lines of credit can also be used in circumstances where there is going to be a repeated cash outlay. The amount may not be known right away, or a vendor might not accept credit cards. Situations that require a large cash deposit, such as a wedding, can be a very good example here. Lines of credit have been very popular in the past, especially when you look at the housing boom. People would often fund home improvements and refurbishment projects by taking out a mortgage for the dwelling and then simultaneously getting a line of credit to fund repairs and anything else related.
Personal Lines of Credit
Personal lines of credit can also include overdrafts. If you have an overdraft then you may find that you can take out money that you do not have, but you will get charged interest for every day that you use it. It’s tied to your bank, and it is a very good way for you to cover things like shopping, or day to day expenses that you might not have expected you’d have to pay.