Tips for Establishing a Line of Credit
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Understand What a Line of Credit Is
A personal line of credit is a revolving account. You can use and reuse it without filling out a new application. The lender establishes a credit limit, but only charges interest on your borrowed amount. A personal line of credit gives you quick access to emergency money and can provide you with overdraft protection for your checking account. Interest rates on credit lines are usually higher than the rates on home equity lines of credit, or HELOCs. Interest on personal credit lines is not tax-deductible, but the interest on your first $100,000 of home equity debt often is.
Beef Up Your Credit Standing
Your credit standing can help or hurt your chances of securing a line of credit. Lenders will check your credit scores and read your credit reports. To maximize your chances, you’ll want to remove any errors from your credit reports, pay down existing loans and control new spending. If you are new to credit, you might want to acquire a credit card, use it for your daily expenses and pay the entire balance monthly before the due date. According to CPA Ren Carlton, “A good step to help establish a personal line of credit is to open a gas station credit card. This will build your credit score and should be easy to pay off on time.” You’ll also enhance your credit standing by promptly paying your utilities, rent or mortgage, car loan and any other bills. A single late mortgage payment can hurt your credit score -- consider using financial software that reminds you of upcoming bills and allows you to schedule electronic payments in advance.
Marshal Your Assets
Different lenders have income requirements. Understand your lender’s requirements and request a credit limit that reflects your income. Lenders may react negatively to overaggressive applications. You might also consider a line of credit backed up by collateral. If you own stocks or bonds, you can have the lender hold them in return for a credit line for some percentage of the securities’ value. Though unorthodox, you might also be able arrange credit lines based on other assets, such as a valuable coin collection, land, or works of art. Lenders are likely to charge less interest on secured credit lines, which is why HELOCs are typically cheaper than personal credit lines. You might benefit by recruiting a co-signer with a superior credit profile.
Credit requirements vary among banks, savings and loan institutions and credit unions. You’ll preserve your credit rating if you carefully research your options before applying for credit, because each application requires a lender to make a credit inquiry that can lower your credit score. Avoid sending out blanket applications to multiple lenders, as the effect on your credit score might disqualify you from any credit line. Consider all the terms attached to a credit line, including interest rate, late fees and requirements to keep an account with a minimum balance at the lending institution. You may qualify for a reduced interest rate if you keep a checking or savings account with the lender. Another factor to consider is whether the credit line is closed-end, meaning it terminates after a specified period of time.