Connect with us

Credit Cards

What is a personal line of credit?

Published

on

researching a personal line of credit on the computer

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A personal line of credit (PLOC) is a type of flexible loan you can use whenever needed, paying back interest and principal only when you use the credit. This is different from an installment loan, where you repay the amount borrowed in full with interest over a fixed term.

The personal line of credit is available to you all the time, to a predefined maximum, and is often used by individuals to cover an income gap.

A personal line of credit shouldn’t be confused with a home equity line of credit or a business line of credit. A home equity line of credit allows you to borrow credit against your home. A business line of credit is similar to a personal line of credit but should only be used for business expenses.

How does a personal line of credit work?

You can apply for a personal line of credit from a lender. The lender will consider factors such as your income, credit score and credit history and debt before approving you. Depending on these factors, you’ll be approved for a predetermined amount. While you initially sign your personal line of credit with a specific interest rate, the interest rate can and will fluctuate based on market trends.

Since personal lines of credit are unsecured loans, they’re usually only approved for people with a good credit history and a credit score of 680 or higher. Individuals with excellent credit may be approved for a personal line of credit of up to $100,000.

Once you’re approved for the personal line of credit, the funds will be available to you via your account. You can take out funds using an ATM, a branch of your bank, your online banking system or a mobile app. Every time you withdraw money, you’ll need to repay it with interest. However, you only pay interest on the amount used, not the full credit line total.

Many PLOCs have an expiration date set into the contract. For example, an individual may be approved for a $5,000 personal credit line for two years. After the expiration date passes, the funds will no longer be accessible in your account.

A personal line of credit is the right solution for someone who needs to cover expenses for which they do not have the finances. While many people turn to credit cards or personal loans when they need to cover costs, a PLOC usually has a lower interest rate than other options.

Generally speaking, only people with good financial habits should consider using a PLOC. It can be very tempting to have access to a large sum of money in your account at all times. If you’re the type of person who has struggled with consumer debt before, a PLOC may not be the best choice.

Additionally, as the interest rate fluctuates on a personal line of credit, it can also be challenging to predict how much you’ll have to pay back. If knowing exact amounts is important for your budgeting, these types of fluctuations can be challenging..

What is a personal line of credit used for?

A personal line of credit should be used to cover income gaps or unexpected expenses. For example, a self-employed person who experiences a drastic dip in earned income one month can rely on their PLOC to cover their bills.

Additionally, if you have significant credit card debt or another loan at a high interest rate, a personal line of credit might help. If your personal line of credit has a lower interest rate, consider transferring your debt balance over.

A personal credit line shouldn’t be used for major purchases, such as a down payment on a house or buying a car. That’s because if you don’t have the cash for these purchases, then you’re likely not ready to buy them yet. A PLOC still charges interest, so when used for a large purchase over the long term, it can mean a significant amount of money lost on interest.

How to get a personal line of credit

The process for getting your personal line of credit can differ depending on your credit standing.

Check your credit

First, you’ll want to check to make sure you have good credit. A PLOC is usually an unsecured loan, so the bank only trusts individuals with a good credit score and solid credit history with this type of loan.

If you have a low credit score, you might consider improving it before applying for a personal line of credit. You can do this by paying off debts and making regular payments on bills. Increasing your credit score before applying can also improve your PLOC’s interest rate and the maximum amount you’re given.

However, even if you have bad credit, you still have some options for acquiring a PLOC. A lender may give you a PLOC even with a low credit score. To compensate, they may adjust the annual percentage rate, lower the total credit limit or possibly ask for collateral. The collateral can be requested in cash or asset form, and the lender may seize the collateral if the credit isn’t repaid.

Choose a lender

Next, you’ll want to choose a lender for your personal line of credit. You will likely have better luck if you use a lender you already have accounts with. This lender has history and experience with you, so there’s a level of trust already in place versus starting anew.

You can also ask each lender what they typically require in terms of credit scores for a PLOC approval. This way, if a lender requires a credit score out of your range, you’ll save time and avoid applying with them.

Submit an application

Now you’re ready to apply for a personal line of credit. Ensure you fill out all the information correctly and thoroughly so you’re not denied based on a mistake or missing field.

Alternatives to personal lines of credit

If you’re denied a personal line of credit, you do have other options you can consider. For example, you can choose an unsecured personal loan or a secured personal loan. These loans are different from a personal line of credit because:

  • You get all the money up front and need to pay interest on all of it.
  • They usually have higher interest rates than a PLOC.
  • There is a predefined payment deadline date for all the money to be paid back in full along with interest.

Additionally, a secured personal loan requires you to put cash or an asset on the line. If you don’t pay the money back, the lender can go after the asset or cash for payment.

Does a personal line of credit affect your credit score?

Yes, a personal line of credit can affect your credit score. As with all loans, your payment history will go into your credit history and therefore be a part of your credit score. If you are late or miss payments, it can negatively impact your credit score.

It can be very beneficial to have a personal line of credit when you’re in a tight financial situation and need some cash. Before you apply for a personal line of credit, make sure to check your credit score and ensure you’re in good standing. If your credit score is low, consider improving it so your chances of being approved for a PLOC increase. If you don’t know where to start, credit repair services can help you work on your credit score.


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source link

Continue Reading

Credit Cards

Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?

Published

on

couples credit history

While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.

Users Who Are Authorized

An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.

If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.

Joint Credit Cards Have an Impact on Your Credit Score

Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.

Accounts Individuals

Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.

Considerations

While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.

Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.

Continue Reading

Credit Cards

Should you pay down debt or save for retirement?

Published

on

rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



Source link

Continue Reading

Credit Cards

How does a loan default affect my credit?

Published

on

loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



Source link

Continue Reading

Trending