Credit lines are like any type of credit: when used responsibly, they can be a lifesaver. The purpose of any credit is to assist you with cashflow and make payments easier – or even safer, as is the case with credit cards and their additional consumer protections. But just because credit has a general purpose, it doesn’t mean any type of credit can be used for any reason. Each type of credit has a particular reason for existing – whether it’s helping you become a homeowner, buy a car or even to pay to fix a washing machine.
The purpose of a cash credit line, as a relatively new type of credit, might not be clear to many consumers. It can sometimes take a little time before people feel confident in their knowledge of a product, and often the only way to reach that is by occasional research and helpful online guides. In this article, we will cover:
A credit line is a running account credit product which allows you to withdraw money, up to your credit limit, into your bank account as often as you need to manage your cashflow and unexpected payments. Credit lines require at least a minimum payment each month, though you should aim to repay the balance in full when possible. You are usually charged interest and transaction fees, but only for the amount you have borrowed – not your full credit limit.
The main benefit of a credit line is the speed of access to funds when you need them. Withdrawn credit is transferred directly into your bank account, usually within minutes, so you can make payments using your normal debit card, by bank transfer or by direct debit. This means you don’t have to worry about changing payment details or having the right cards with you to make unexpected purchases or when meeting increased bills.
Having the option to make a minimum payment each month to keep within the terms of your credit agreement means you can manage your finances flexibly, and may better suit your income and expenditure fluctuations. While making just the minimum payment each month will take you longer to pay off the amount borrowed (and increase the amount of interest you repay overall), it does allow you a little financial and stress relief in those months where money is tight.
Another benefit of credit lines is their high acceptance rates for people with a bad credit history. This means that if you have a low credit score or a poor credit file (either from recent years or half a decade ago), you might still be able to access quick and easy funds without a guarantor.
Finally, credit line applications can be made online which makes the process of applying for a credit line simple and quick. You typically receive the decision within minutes of your application being complete and you can withdraw funds straightaway if the application is approved. So, even if you are in a rush to meet an emergency payment, applying for a credit line would take no longer than submitting an application for a payday loan, and is generally much quicker than applying for a credit card or arranging an overdraft with your bank.
The benefits above explain why a credit line is useful – you have access to quick cash, repayments are flexible and having bad credit doesn’t exclude you from this type of credit. However, the reason a credit line would help you – and therefore, the purpose of a credit line, depends more on your individual circumstances. Your circumstances and the reason you need to borrow money are important because using the wrong type of credit could cause financial difficulty. For example, if you need to borrow £200 to fix a washing a machine, then it wouldn’t be sensible to take out a bank loan of £2,000, as you pay interest on the total amount borrowed, not just the amount you need to use.
If you need to borrow a lot of money – maybe to buy a car or to build an extension – then a credit line is unlikely to help you, as the maximum amount will be too low. However, if you need occasional access to funds to help manage your cashflow and meet unexpected payments from time to time, you might find a credit line useful. If you already use a credit card or an overdraft, or even payday loans, then a credit line is an alternative borrowing option, especially if you have a bad credit history. Even though a credit line is a new credit product, it won’t fix any long-term financial difficulty you have been facing or will face in the future. Credit isn’t designed to be a secondary source of income, and you should never borrow to repay other borrowing. The purpose of a credit line is to help you with your money management, not to make your situation worse.
More questions? Check out our Info Hub.