Credit Card Guide
What is a Credit Line?
Every one has a limit set on the amount of credit they can get. This limit is called the credit line or line of credit. It specifies the exact amount of credit that is extended to a borrower from the state, bank, or any other financial institution.
The line of credit is available in several forms such as discounting, overdraft protections etc. and it is often based on the borrower's credit rating. A credit rating or a credit score is a three digit number that conveys the consumer's credit risk to any lender. It shows the payment history, how the consumer has used credit in the past and more importantly, it is used to determine whether the consumer is credit worthy.
Different Types of Credit Lines
The most basic and the most commonly available credit line is the maximum amount of credit available to any person on their credit card. Different credit cards have different set limits. The most basic card can have a credit limit of $300 and the higher the credit limit, the lower the credit risk of the person using it. Although this is an inverse ratio, it makes perfect sense because people having high credit limits are usually those with very good credit ratings.
Another type of credit line is the one meant for home equity. It is known as HELOC or the home equity line of credit. Home equity is defined as the difference between the amount owed on a home and its actual worth. Most home owners take a home loan when they purchase their house and over a period of time build home equity as they pay off the loan amount. The HELOC is a credit line extended to the home owners based on the amount of equity they have already established by paying off their mortgage. Typically most such credit lines are made available with an adjusted variable rate of interest, which can be converted into a fixed rate over a period of time. The HELOC takes into consideration several factors before the actual credit is extended to the home owner. Some of these being the upfront costs including the appraisal fee, any predetermined application fee, and closing costs.
When applying for such a credit line, all these factors must be taken into consideration. Furthermore, some credit lines allow for a fixed set of payments over a period of time, when it comes to repayment methods. Others allow for repayment options of making minimum payments for a set period of time. It is also important to note that when a house with a line of credit is to be sold, the balance in the credit line has to be completely paid off before the sale occurs.
Business Credit Lines
Banks often extend a line of credit to business owners who have an established history or relationship with the bank. Most business owners use such credit lines as a source of maintaining liquidity in the business. Cash is not always readily available and making business deals often requires overdrafts or making payments to vendors before payments from clients come through. In such a scenario, the credit lines extended to the business are of big help.
Depending on the relationship with the bank, business owners may have these lines of credit backed against collateral or a business lien or in some cases, the credit line might be unsecured. When the credit line is unsecured it is usually done on the basis of the business owner's personal guarantee that the credit line will be fully paid for.
Understanding the Terms and Conditions
Each line of credit comes with its own terms and conditions. Business owners, credit card owners and home owners must be careful to understand all the terms and conditions of the agreement. If something is confusing, get it clarified. This is the best way to avoid any misunderstanding when it comes to credit. Misunderstandings and mistakes can be devastating for growing businesses. Credit is a privilege that can be taken away at any point. Such mistakes, especially when it comes to credit lines, are best avoided.
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Credit Card FAQ
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- What is a Credit Card Default Interest Rate?
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- More at: Credit Card FAQ