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What is a line of credit?

Generally, a line of credit can be thought of as any revolving credit facility or running account. This means, a type of credit that you have constant access to, whilst only submitting one application. You’ll be able to draw the funds at any time and you will only pay interest on the money you have withdrawn, not on your entire credit limit.

A line of credit, like any credit product, is designed to assist you in managing your cashflow throughout the month. Some months, you may need your entire credit limit and others you may not use it at all. Similarly, there may be occasions throughout the year that mean you can repay the line of credit in full – such as receiving a bonus from work – and other moments where you can only afford the minimum payment.

Lines of credits are generally flexible borrowing products which you can use at your discretion to meet your financial needs. However, it’s always advised that you only borrow when you need to and when you know you can afford to make the repayments, even if they’re spread out over a few months. This is because missing your repayments can cause serious money problems, like finding it harder to obtain credit in the future. Additionally, it isn’t only lenders who may assess your credit history as part of an application: often landlords will check your credit file as part of your rent application and missed payments – even for a line of credit – may be quite serious.

Examples of a Line of Credit

A line of credit can come in a variety of forms, many of which you will have likely heard of:

This might help explain what a line of credit is. It’s a credit facility you can draw money from whenever you need access to fast cash. It may be an extension of your bank account, like an overdraft, or an entirely different financial product, like a credit line.

Repayments on a Line on Credit

Often, you will only be required to make a minimum payment each month, but each line of credit will have its own policies. Therefore, it’s important to read any and all documentation prior to accepting a credit agreement to ensure there are no misunderstandings during the borrowing term. Additionally, if you have a demand line of credit, the lender can require you repay the entire principal amount borrowed, plus interest and fees, at any time. Demand lines of credit are not very common in the UK, and so typically the only time the lender may demand you settle the line of credit in this country is if you breach the terms of the agreement.

Quick Questions about Lines of Credit

Benefits of a Line of Credit

Lines of credit can be very useful credit products. As you can withdraw the funds whenever you need to, you might have a sense of financial security that doesn’t come with having to use payday loans, for example. This is because you can access the credit at any time, and you don’t have to wait for an additional application to be approved first. Plus, the repayments are fairly flexible compared to fixed loans.

Interest Rates on Lines of Credit

Generally, the interest rate on a line of credit is lower than a payday loan, though alternative lines of credit often can have a higher interest rate than mainstream forms of credit. You can compare different credit products using the APR, but it may be more helpful to compare lines of credit using the p.a. interest rate (per annum).

Is a line of credit the same as a credit line?

A ‘line of credit’ is not synonymous with a ‘credit line’ because although a credit line is a line of credit, not all lines of credit are credit lines. A credit line is a relatively new credit product and below, we’ve put together a list of helpful articles from the Polar Credit Info Hub to help you learn more about credit lines.

More Information about Credit Lines

Sustainable Credit

What are credit lines used for?

What is a credit line?

Who would benefit from a credit line?