What Is A Line Of Credit And How Can It Help?

You've probably heard us talk a lot about lines of credit, mortgages and credit cards. You've also probably heard us talk about the importance of a credit mix (having a healthy combination of different credit products). Today we're going to focus on lines of credit. What is a line of credit and how can it save you money?

How It Works

A line of credit is borrowed money extended to you by your financial institution. Your bank will offer this product to you much like they may a credit card or loan. Your line of credit is a revolving form of credit, so it works a lot like a credit card does. When you pay down what you've spent on your line of credit, that money becomes available for use again. Unlike your credit cards, your line of credit is accessible via your bank card and online banking apps. Whether you will need to provide a security deposit on your line of credit will depend on your credit score.

Differences Between A Credit Card

Unlike a credit card, a line of credit is very similar to an extra bank account. It has a much lower interest rate compared to a credit card which can save you a lot of money. Because your line of credit has a much lower interest rate, you can transfer the balance on your credit cards to your line of credit. If you've been struggling to pay off your credit card balance because of the interest rate, you could pay it off in full with your line of credit and voila! You have the same balance, but now with a much lower interest rate.

What To Watch Out For

It's important to note that you should only give this method a shot if you have enough self-control not to run up your credit card again. This trick is for saving you money on interest. If you continue accumulating a balance on your credit cards, you're setting yourself up for failure and digging yourself into a very deep hole. In this scenario, you end up with two large balances racking up interest. One is just lower than the other.

However, if you're looking to reduce your debt and boost your credit, this is a promising method. It gives you the ability to tackle the principal owed as opposed to just managing to pay down the interest each month.

If you find that you need help tackling your debt, consider a credit building program. Click here for more information.

Have you ever saved interest by transferring your credit card balance to a line of credit? Let us know in the comments!