Lines of Credit

A Line of Credit (LOC) is a revolving credit account similar to a credit card. You’re approved for a maximum credit limit, but you only pay interest on the amount you borrow. Unlike a term loan with a set repayment schedule, you can repay and re-borrow from your available credit as needed. This makes it a flexible option for ongoing expenses or unexpected needs.

Once approved for a line of credit, you can access funds up to the specified credit limit. You only pay interest on the outstanding balance, not the entire credit limit. Minimum payments are typically required on the used amount, but you can also make larger payments to pay down the balance faster and free up your credit line again.

There are two main types of LOCs: secured and unsecured.

Secured LOCs require collateral, like your house or qualifying deposit, to qualify for a larger credit limit and potentially lower interest rates.

Unsecured LOCs don’t require collateral but may have lower credit limits and higher interest rates.

Lines of Credit offer flexibility to borrow funds for various expenses. Common uses include:

• Home improvement projects
• Unexpected expenses
• Medical bills
• Consolidation of high-interest debt

Qualification requirements for LOCs is generally based on your:

• Credit score and history
• Income and employment status
• Debt-to-income ratio
• Banking history
• Overall assets

Interest rates on LOCs are typically variable, meaning they can fluctuate based on market conditions and your creditworthiness. Look for the Annual Percentage Rate (APR), which includes the interest rate and any fees associated with the LOC. These fees might include annual fees, maintenance fees, transaction fees, or late payment fees.

Using a Line of Credit responsibly can positively impact your credit score. Here’s how:

• On-time payments: Make consistent minimum payments to build a good payment history.
• Credit utilization ratio: Keep your outstanding balance low compared to your credit limit. This shows responsible credit use.
• Length of credit history: Having a LOC account open for a long time helps establish a longer credit history, a positive factor.

However, missed payments, exceeding your credit limit, or high credit utilization can negatively affect your score.

A line of credit is a type of loan that offers revolving access to a credit limit that you can borrow from as needed with flexible repayment terms and variable interest rates. A line of credit is different from a fixed term loan that provides a lump sum of money upfront, which is repaid over time with fixed monthly payments and a predetermined interest rate.

To apply for a line of credit, you need to submit an application. At UCU we will check your eligibility for a loan with our credit granting criteria, including your credit score, income level and employment stability.

You can repay a line of credit by making regular payments toward the outstanding balance. Minimum payments are typically required each month, but you can choose to repay more to reduce interest costs and pay off the balance faster.

Here are some additional points to remember:

• Interest charges: Interest is typically calculated daily on the outstanding balance of your LOC. Making larger payments or paying off the balance in full minimizes interest you accrue.
• Due dates and late fees: Make sure you know your payment due dates and minimum payment requirements. Missing payments can result in late fees and potentially damage your credit score.
• Automatic payments: Consider setting up automatic payments to ensure you never miss a payment due date.

In some cases, you may be able to request an increase in your line of credit limit. You can ask for a decrease to your line of credit limit.

Increasing Your Limit:

• Benefits: A higher credit limit offers greater borrowing flexibility for unexpected expenses or purchases.

Decreasing your limit:

• Reasons to decrease: You might want to reduce your limit to:
  • Manage spending: Limit potential overspending.
  • Improve debt-to-income ratio: A lower credit limit can improve your debt-to-income ratio, which is a factor in credit scores.

Lines of credit (LOCs) and car loans are both financing options, but they serve different purposes and have distinct features. Here’s a breakdown of the key differences:

Purpose:

• Line of credit: You can use it for a variety of purposes such as unexpected expenses, home improvement projects, debt consolidation, or any other needs that arise (including buying a car).
• Car loan: Specifically designed to finance the purchase of a vehicle and the loan amount is based on the price of the car.

Loan structure:

• Line of credit: Revolving credit with a pre-approved credit limit. You can borrow and repay funds repeatedly within the limit. Interest is charged only on the amount you borrow.
• Car loan: Installment loan with a fixed principal, interest rate, and repayment term. You make fixed monthly payments until the loan is paid off in full.

Interest rates:

• Line of credit: Interest rates are usually variable and can fluctuate based on market conditions and your creditworthiness.
• Car loan: Interest rates are typically fixed for the loan term, offering more predictability in your monthly payments. Car loan rates are generally lower than LOC rates due to the specific purpose and collateral involved (the car itself).

Collateral:

• Line of credit: This can be secured (backed by collateral like your house or term deposit) or unsecured (based solely on your creditworthiness). Unsecured LOCs typically have higher interest rates.
• Car loan: Almost always secured loans. The car you purchase serves as collateral for the loan. If you default on the loan, the lender can repossess the vehicle.

Down payment:

• Line of credit: No down payment required.
• Car loan: A down payment is often recommended to reduce the loan amount, lower your monthly payment, and potentially qualify for a better interest rate. Some lenders might require a down payment.

A student line of credit is a specific type of Line of Credit (LOC) designed to help students cover the costs associated with post-secondary education. Here’s a breakdown of what makes them unique:

• Target borrowers: Students enrolled in accredited colleges, universities, or other qualified institutions.
• Purpose: Financing educational expenses like tuition, fees, textbooks, living expenses, or other related costs.
• Benefits include:
  • Lower interest rates: Typically, lower interest rates compared to credit cards or unsecured personal LOCs.
  • Flexible borrowing: Borrow only what you need up to your credit limit and repay it over time.
  • Build credit history: Responsible use can help students establish a positive credit history for the future.
  • Grace period: UCU offers a grace period after graduation where you only pay interest on the borrowed amount before repayment begins.

A home equity line of credit (HELOC) is a form of revolving credit secured by a homeowner’s property equity, allowing them to borrow against the value of their home. It provides a flexible line of credit for accessing funds and a subsequent repayment period. Typically offering variable interest rates, HELOCs can be used for various purposes such as home improvements, debt consolidation, or other expenses. It’s important to consider the terms, risks, and potential tax implications before obtaining a HELOC.