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?