A personal line of credit may be your ace in the hole during financially tough times, but there are many factors to consider when finding the right one for you.
No matter how well you budget, life has a way of challenging even the most air-tight spending plan.
Your cat swallows a rubber band and needs urgent veterinary care. Or your son twists his ankle while playing intramural sports. And on top of that expensive clinic bill, you have to shell out to pay for hospital parking.
A line of credit offers a way to handle these unexpected emergencies, but they may not be the right solution for everyone.
If you’re considering getting a personal line of credit (or LoC), here are some things you should think about first.
1. Be Wary of the Minimum Payment
One of the biggest differences between personal loan vs line of credit products is the billing process.
Whereas a loan has a fixed schedule that determines the size and frequency of your payments, a loan like an LoC has two possible options. You may pay off your balance in full or make what’s called a minimum payment.
When money’s tight, a minimum payment is a huge advantage. It’s generally a small fraction of your bill. As long as you pay it on time, you’ll avoid late fees and other penalties.
It’s a lot easier to stomach than your entire balance, but what about when you have the cash to spare in your budget?
A financial institution like CreditFresh, which offers unsecured line of credit loans, recommends paying off as much as your balance as possible.
There are three main advantages to this plan, including:
- Reducing your balance
- Freeing up your available funds
- Decreasing your interest charges
2. What are the Interest Rate and Fees?
Whether you opt for the minimum payment or your full balance, your bill may include interest and financing charges. These will have a big impact on what you end up paying month-to-month.
The interest and fees you end up paying depend on a lot of factors, but your credit score may be one of the most influential ones.
As a financial rap sheet for your past borrowing behavior, your score lets financial institutions know how you manage debt.
Financial institutions sometimes adjust the interest and rates to reflect how risky they think lending to you may be. Generally, a higher score unlocks lower rates and fees, while a lower score will see those charges increase.
No one wants to pay more when there are cheaper options available. But if disaster strikes suddenly, you may not have the time you need to improve your score before you apply.
But over time, you may commit to good habits that may impact your history so that the next time you need help, you may unlock better rates.
Paying more than the minimum payment is one of those good habits — but it’s far from the only way you may impact your history. The next time you get an LoC, find out how you might affect your score. This may help you the next an emergency comes your way.