online line of credit

What’s a Line of Credit and How Does It Work?

If you’re curious about taking out a line of credit, here’s what you should know before you get started. We’ll break it down.

There are lots of ways to get credit these days, including:

  • Credit cards
  • Payday loans
  • Personal loans
  • Lines of credit

And each method has its nuances. Most folks are familiar with credit cards. And payday loans are a type of personal loan with short repayment times (usually two weeks to a month).

online line of credit

Personal loans include installment loans and lines of credit. Installment loans are a one-time loan that you can repay over a longer period, like months or years. Lines of credit give you open access to money without requiring a new application.  

1. A line of credit is an open-end, unsecured account

With installment loans, you apply, get the money you need, and you’re done when you repay it. If you want another one, you must apply for a new loan. Usually, the lender will pull your credit score and history to determine how much they’re willing to lend.

Compare that with a line of credit, which is an account you can draw from whenever you need it. It’s like having a safety net you can use again and again.

When you repay the money you’ve drawn, your available credit resets. If you need to use it again, there’s no need to apply for a new loan. Your line of credit is available for another draw, provided you have enough available credit in your account.

2. You only apply once

Any time you request credit, like when you apply for a credit card or personal loan, you’ll see it noted on your credit report, and your score could dip temporarily.

When you open a line of credit, you’ll see that same request for new credit on your credit report. But each time you ask for money from your open credit line, it won’t show up on your credit file. Instead, you open it once and it’s yours whenever you need it. Just request a draw, repay, and repeat – as many times as you need.

3. It’s cash in your checking account

With a line of credit, you’ll want to draw enough to cover your expenses because you’ll receive cash in your checking account.  

You’ll have a payment schedule and will need to repay according to the repayment terms – and that could be weekly, bi-weekly, or monthly, depending on when you get paid.

Because of this, you’ll need to plan to take out enough to pay for what you need, like a car repair, supplies, medical bills, or whatever else pops up. After that, you’ll start paying it back and freeing up your available credit for next time.

Who should consider a line of credit?

Having a line of credit available can be a huge relief if an unexpected expense pops up. Because it’s there to draw from over and over, you won’t have to go through the hassle of requesting or applying for a new loan.

You don’t need excellent credit to apply for a line of credit. Instead, most lenders look at many factors when assessing your application, like how long you’ve been at your job, your normal paycheck amount, and the cash flow in your bank account. In addition to your credit report, they can build an idea of your ability to repay. Even if you think your credit score is less than perfect, a line of credit might be a good choice for you.  

Bottom line

A line of credit is a bit like having a credit card, but without the physical card. It requires more planning because you’ll need to request a certain amount to draw. Then, you’ll receive a cash deposit into your checking account.

From there, you’ll repay according to a set schedule. And when it’s repaid, you’ll have access to your credit line all over again to use as many times as you need.

You need only apply once, then you can draw funds as needed. In this way, having a line of credit can be a huge relief.

If you’re considering opening an account, check out Echo Credit as your line of credit solution.

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