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What Is A Credit Line?

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

A credit line is like a credit card in many respects.  With it, you have access to cash (within fixed limits) if you need it.  The notable differences are that the interest rates on equity lines are usually far lower than the rates credit card companies charge.  Also, the amount you can use is typically far greater than the credit card limits.  Equity lines are also usually secured by real estate and the interest you pay is sometimes tax deductible.  So the equity line is one of several alternatives to credit card that can be a great tool to have in your toolkit.  Let’s dive deeper.

If you want a credit line (sometimes referred to as a Home Equity Line Of Credit) you go to the bank and apply for it just like you would a mortgage.  And just like a mortgage you’ll get an appraisal done and some other paperwork prepared.  Sometimes the bank charges for this.  Other times it’s free.

As I said above, when you apply for a HELOC (credit line on your house) you collateralize the loan with your property.  If you don’t pay, you lose your house.  That’s one of many reasons I am not a fan of using a HELOC to finance your lifestyle.   Make sure if you do arrange and tap into this loan, you are sure you’ll be able to live with the payment schedule and you are going to use the money for a darn good reason.

People sometimes use a HELOC for home improvements and it can make sense but I’m still not in favor of doing this if it can be avoided.  I had to tap into my HELOC when we had a flood in our house but we repaid it fast when the insurance money came in.  In any event, I realize that sometimes emergencies happen and using these types of loans in those situations can make sense.  Just take it easy.   Please don’t use credit lines to finance college for your kids.    (If you are even thinking about that it means you are spending too much on college relative to your financial situation. There are better ways to get an excellent college education without overspending.)

Does this mean you shouldn’t get a HELOC?

No.  Having a credit line is always smart if it doesn’t cost a lot to put in place.  Having a credit line is different from using a credit line.  It’s a great source of emergency cash – but that’s what it should be used for; emergencies.

If you own a business, using a credit line might be a very smart thing to do. This credit allows you to eliminate business debts or expand your business and can really make sense to do. For example, if you can buy more inventory and earn 40% profit on it, why not use a credit line that only costs you 6%? I’ll take that deal all day long.

On the personal side, it can also make sense to use a credit line to pay off expensive credit card debts as long as you don’t run those balances up again and in essence, spend your equity on your lifestyle.  No Bueno Amigos!

Have you tapped into your credit line? What for? Did you repay the debt? How quickly? Are you glad you have a credit line?

 

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Comments

  1. Doable Finance says

    March 28, 2011 at 1:33 AM

    No matter how you slice and dice it, it’s other people’s money. You are renting it for a short time. It’s your moral obligation to return it to its original owner intact and by the mutually agreed upon due date.

    Reply
  2. krantcents says

    March 16, 2011 at 12:20 PM

    Personally, I like lines of credit. I only pay for what and if I use it. In my case, there was no cost to setting it up.

    Reply

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Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 1:19 PM

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