CASH 1 Blog - News

CASH 1 knows money. We've been a financial institution for over 20 years. Read our blog to learn ways to manage your debt, loans and personal finances.

7 Tips On How To Use Your Line Of Credit Wisely

  • by Harita Solanki|
  • 0 Comment |
  • Updated: February 23, 2022 |
  • Credit

7 Tips On How To Use Your Line Of Credit Wisely

Having access to a personal line of credit is considered a proactive step to counter unexpected expenses & financial emergencies with confidence. It helps you receive the funds when you need them to tide you over. Once you get approved for a line of credit, you can use it when there's an emergency and pay interest only on the amount you are using.

Although you can use a credit line for pretty much any purpose, it doesn't make sense to use it to finance your holiday. Doing this will only eat away a big chunk of your credit limit, which you could use during any financial emergency or support a significant purchase. Therefore, like any other form of credit, a line of credit can only benefit you if you know how to use it responsibly. We've put together seven tips to make wise use of your line of credit and help you build good credit:

Use When You Don't Know The Exact Amounts

Some expenses come out of nowhere. Though you know that you'll have to face them someday or the other, they might come uninvited and ruin your budget. For instance, significant home repairs are inevitable, and you may not be prepared for them when they suddenly pop up. This is when you can use a line of credit only and only if you don't have an emergency fund to take care of such expenses.

Yes, it's better to save your line of credit for extremely urgent times when you can't wait to fill out another loan application. The flexibility of a line of credit makes it one of the best forms of credit to use when you don't know when and how much money you may need at any point of time in your life.

Know the Two Phases of Your Line Of Credit

Usually, a line of credit has a draw period and a repayment period. You can check your credit line agreement to know when the draw period ends, and your credit line goes into the repayment period. You can borrow funds multiple times within the credit limit allocated by your lender during the draw period. Although it's named the draw period, you have to make minimum payments to replenish your credit limit to borrow again.

When you reach the repayment period, you can no longer withdraw any funds but will have to continue making monthly payments until you repay the outstanding balance in full. You may invite financial trouble if you fail to make payments during the draw period or the repayment period.

Prefer Using Less Than 30% of Your Credit Limit

The percentage of credit limit you use from your line of credit can significantly influence your credit score. You may see a drop in your credit score if you utilize more than 30% of your entire line of credit. This implies borrowers should use less than 30 percent of their credit limit to avoid hurting their credit score. By regulating your withdrawals and making timely payments, you can maintain a good credit score.

For example, your total credit limit is $10,000, and you withdraw $2,000. This means you're using 20% of your credit limit, which won't hurt your credit score. But if you have a credit limit of $4,000, drawing $2,000 would mean using 60%, negatively affecting your credit score. Essentially, you should draw money based on your need, income, and repayment ability.

If you have a $2,000 balance:

Differences between secured and unsecured closed-end credit

Don't Request for a Line Of Credit Limit Increase

If you are planning to request an increase in your credit limit, it's better to hold back. Demanding a hike in your credit limit might hurt your credit score. Most lenders initiate hard inquiries when you ask for an increase in your line of credit limit, and hence you may see a fall in your score.

There are other ways that you can adopt to extend your credit limit. In some cases, you can be eligible for a higher credit limit if your income has increased. One promising way to automatically increase your credit limit is by perpetually making repayments on time. You can gain your lender's trust and be awarded an increased credit limit for being one of their loyal and trusted borrowers. On the contrary, failing to pay your outstanding balances on time can reduce your line of credit limit and subsequently reduce your creditworthiness.

Use as an Alternative to a Credit Card

If you need funds to pay for an unexpected bill before your payday, you can use a line of credit. It's a more convenient option than a credit card. This makes a line of credit a comparatively affordable borrowing option for those already struggling on a tight budget. You can save money on interest by choosing a line of credit over a credit card on certain occasions. With the flexible repayment option that most lines of credit lenders provide, you can repay the borrowed cash with ease and get continuous access to funds whenever needed.

Don't use for Paying off a Mortgage

Using a personal line of credit is not an appropriate option to pay off your mortgage, especially when your line of credit is an unsecured one with a lower credit limit. Mortgages are usually of large amounts, and using up a more significant share of your line of credit for them could put your financial situation in trouble. If you're not happy with your current mortgage terms, you could choose to refinance your mortgage instead of using your line of credit.

Avoid Making Down Payments

Withdrawing funds from your line of credit to make a down payment may not be approved by your mortgage lenders. Your mortgage lender checks your debt-to-income ratio to determine your ability to make your mortgage payments. Using funds from your credit line would increase your debt while your income remains constant. An increase in the debt-to-income ratio indicates you as a risky borrower. Hence, avoid using your line of credit to make down payments.

CASH 1 offers a personal line of credit with minimum requirements. If you get approved, you can easily borrow funds whenever you are short on funds. You need to know when is a good time to use your credit line and rely on other available sources of funds. Adopting these tips and using your line of credit wisely can keep you from being strapped for cash.

Showing 0 Comment


Comments are closed.