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What is a Line of Credit?

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What Is an Line of Credit?

A credit line functions like a credit card: You only use as much as you need and you pay only interest for the amount you spend.

Updated on January 7 2022.

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An unsecured line of credit an loan you use like a credit card. You borrow a set amount of money and only use the amount you require and pay interest only on the amount you use. It’s different from an , which you repay fully with interest over a predetermined period of time.

How does a line of credit work?

Personal lines of credit the lender will preapprove you for a particular amount. The funds are used over time as needed, and you pay only interest on the amount that you use, rather than the full amount.

Lines of credit requirements differ based on the type and lender, but people with good or excellent credit (690 or higher on the FICO scale) are more likely of getting approved at the lowest rates offered. Personal lines of credit typically have lower interest rates than credit cards but they are flexible, meaning that they could fluctuate.

Bank customers can hold an open line of credit to cover emergencies or as an overdraft insurance for their checking account.

The majority of lines of credit come with two phases:

Draw period: When you’ve been approved for a line of credit then you’re in the draw period and are able to make use of the funds as frequently as you’d like. During this time you’re required to make minimum monthly or interest-only installments, depending upon the lending institution. Some lenders offer credit lines that allow continuous draw periods you can leave open.

Repayment period: Once an amount of time, your credit line becomes repaid and you cannot access the money.

Unsecured vs. secured lines of credit

Unsecured credit lines Personal lines of credit typically are unsecured. The lender will use only the information you provide such as your credit score income, your earnings and outstanding debts for instance — to determine if you qualify to receive a line of credit. The information you provide can affect the amount of credit and the annual percentage rate you are offered.

Secured lines of credit: The ability to secure a credit line that is secured by collateral can assist you in qualifying or getting lower rates. An example is secured credit line where your home is collateral for the borrowed funds. Small-sized businesses can make use of inventory or real estate as collateral to secure a . The lender could take your property if you fail to repay.

Compare personal credit lines as well as credit cards and personal loans

Personal credit lines

Credit cards

Personal loans

Approximate APR range




Borrowing amount

Lender decides your credit limit.

Lender decides your credit limit.


How do you borrow

As required.

As required.

Lump sum.

Repayment terms

Variable based on lender.


From 1 to 7 years old.

Monthly payment




Annual fees




Type of credit




Lines of Credit for Personal Use

Personal credit lines are typically provided by credit unions as well as smaller banks, but there are some banks that offer these. Credit lines have rates that range from 7% and 20% and are wildly different. A credit line could also come with an annual cost that you are required to pay no matter if you use the available funds.

A lot of lenders have an online application, but small financial institutions may need an initial phone call to begin.

They work best when The line of credit allows you to have money available for unexpected expenses. They also work well for ongoing projects that have variable costs and timelines, like home or business remodeling.

Credit cards

Credit cards are usually issued by credit unions, banks, or banks. Credit card APRs typically range between 11.99% to 24.99%. It is possible to apply for credit cards on the internet and receive the card within 7 or 10 working days following the approval.

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They work best when They are designed to be used for daily use. They can be used to purchase gas or groceries or purchase furniture or pay for repairs to your car. It’s a best practice to keep your at or below 30%, so credit cards aren’t ideal to purchase expenses that go beyond the threshold.

Personal loans

Personal loans can come from a credit union or online lender. These loans are usually non-secure and are offered at rates of 5.99 percent to 35.99%.

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You can often take out an individual loan online to look at possible rate and loan amounts. A majority of lenders approve within a day or two and then pay your loan in a lump sum within just a few days after the approval. Repayments toward your loan typically begin the next month.

The best time to use them is The personal loan can be a viable option for major single-time costs like repairs to a roof or .

Check if you are pre-qualified for an individual loan without impacting your credit score

Simply answer a few questions to get customized rate estimates from several lenders.

How a line can impact your credit score

A personal credit line could cause your credit score to dip. This usually is only a temporary dip of some points.

Beyond that, the rest of the reliance is mostly on the repayments. Regular payments to revolving credit lines can build your credit score, however missed payments could hurt your score, so you should only borrow with plans to repay it.

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Closing the account may increase your credit utilization , which can negatively impact the credit rating. If you’re planning to replace your credit line, think strategically regarding the process. For example, if you’ve made an application for credit recently put off a few months since a string of credit applications can lower scores.

About the author: Annie Millerbernd is an individual loans writer. Her work has appeared in The Associated Press and USA Today.

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