Do you Need that Personal Line of Credit?

At least once a week, I find a letter in my mailbox from one bank or another, offering me an “approval guaranteed” line of credit for thousands of dollars. Do I need the money? No. Not right now, anyway. But what if I need it later? In fact, that’s just what the banks say. It’s not for now. It’s for later.

What is a line of credit?

A line of credit can be best described as flexible funds that can be used for pretty much anything – home renovations, vehicle purchases, daily spending or consolidating debt. Offered by your financial institution, they have a lower interest rate than your credit card, making them especially attractive to those with high-interest credit card debt. Credit amounts range from $500 to $200,000, to which you have unlimited access. Lines of credit are only offered to those who already have good credit, and usually they don’t need it. Similar to credit cards, lines of credit should be paid off monthly, whether you choose to pay off a very small portion more.  If you don’t make any payment on your line of credit over the course of a few months, the interest will pile up, it could adversely effect your credit score and you’re bound to get a few calls from your bank.

Before considering a line of credit, ask yourself these four questions:

  1. Why do I need this money?
  2. What will I use it for? If you say “emergencies,” clearly outline examples of what you consider an emergency.
  3. Do I really need this money?
  4. How much will the interest charge be and how long will it take me to pay back?

The Pros and Cons of Lines of Credit


  1. Yes, a line of credit will help you build credit, but you need credit to get it in the first place, so this might be an unnecessary move.
  2. You can pay off those credit cards at a lower interest rate (see Cons).
  3. They’re flexible, meaning you only pay interest on the amount used.
  4. Your line of credit, depending on what kind you get, may be tax deductible.
  5. You have constant access to funds, if needed (see Cons).


  1. Unlike loans, lines of credit usually have variable interest rates, meaning interest rates can change from month to month.
  2. You can pay off credit cards at a lower rate – BUT many who do this end up maxing those credit cards out again, creating further financial stress.
  3. You have constant access to funds. This one is scary. Most banks advertise the ease at which you can access your funds – online, on your mobile phone, through an ATM – all 24/7. For those who have difficulties with credit, this could be a nightmare.
  4. There’s the potential to rack up serious debt. With a loan, the lender determines how much you need up front and the money goes toward that purchase only. With a line of credit you have access to that money whenever you want. You can spend it however you see fit, regardless of whether or not it’s smart-spending.
  5. It’s tempting. If you have access to $10,000 every day, it’s all too easy to come up with things you “need”. If you think a line of credit could lead to temptations, reconsider.

If you do decide to go ahead and accept the line of credit be prepared to handle that kind of debt. Make sure you have a plan to pay it back and a payback date. The money is easy to spend, but much harder to pay off.

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