What are lines of credit?

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A line of credit is a type of revolving debt or financing program issued to a borrower on predetermined terms. A line of credit typically has a maximum credit limit, but borrowers are able to borrow multiple times within that the credit limit.

Lines of credit are most often issued by banks and other regulated financial institutions. The most common types of lines of credit include the following:

  • Credit cards – includes store and traditional bank cards, including secured and unsecured.
  • HELOCs – a home equity line of credit is a credit line secured by the equity in the borrower’s home.
  • Business credit lines – many companies rely on bank-issued credit lines to meet payroll and other operating expenses.
  • Vendor credit – many vendors provide credit lines to individuals and businesses to purchase their merchandise, similar to department store cards.

Credit line requirements and approval process

The most commonly available line of credit type is the credit available on a consumer credit card. When an individual applies for a credit card, the lender will evaluate the credit card application by considering the applicant’s income, obligations and credit history. Upon a satisfactory review of the application, the lender will establish the credit line.

Most lines of credit are evaluated and set up in much the same manner.

The borrower can then access the credit line as needs arise and repay the amount borrowed at the next statement in part or in full. A line of credit is a form of revolving credit, where the amount borrowed and amount due can change from month to month. A lender can increase or decrease a line of credit based upon the borrower’s payment history and lending guidelines.

Another common type of credit line is a home equity line of credit, or HELOC. This type of credit line is based upon the borrower’s equity in their home. For example, if a home is valued at $400,000 and there is a current mortgage balance of $300,000, there is $100,000 in equity. A HELOC will be placed against part or all of the available $100,000 equity.

Because the property’s title is used as collateral for the HELOC, these credit lines are normally considered secured debt. A borrower with an equity line of credit can write a check against the equity in the property for any purpose and at any time, as long as the total amount borrowed against the credit line does not exceed allowable limits.

Business credit lines

Another type of credit line is a business line of credit. A bank can provide a line of credit to a business to be used as the business sees fit. Often the business uses the line of credit to make payroll or acquire machinery or other assets. As the line of credit is accessed, the business repays the loan in part or in full at the next billing period.

A line of credit can be issued with most any asset used as collateral but the most common types of lines of credit are those issued on a home’s equity and as a business loan. Because many commercial banks offer lines of credit it’s suggested to shop around as much as possible to find the most favorable terms.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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