How to Get the Most Value Out of a Line of Credit

The primary benefit to having a line of credit is flexibility. If you don't use it, it doesn't accrue interest. If you do use it, after you pay back what you owe, you're free to use it again. You can also choose to only use a small portion of it, saving the remainder for later.

What should you use a line of credit for? If you simply want more money to spend on a single purchase, take out a loan. If you need a flexible way to access money when you need it, a line of credit is probably the right fit for you.

Scenarios for Using a Personal Line of Credit

You can view a personal line of credit as a flexible spending account or an emergency fund to be used only when necessary. Either of these is okay, provided you can afford to pay at least the monthly minimum payments. Here are some examples of each:

  • Flexible Spending Account: Parents with dependent children know that unexpected expenses pop up all the time. The school has a program or event that requires money. The child wants to pick up a new sport. A birthday party is coming up. These are all scenarios where having a line of credit comes in handy. 
  • Emergency Fund: You could get approved for a personal line of credit and not use any of the money unless there's an emergency. It's nice to know that there are extra funds available when life throws an unexpected curveball your way. This could be something as small as a minor fender-bender or as big as a global pandemic.

You can use your imagination to envision additional scenarios. Everyone needs extra money at some point and some folks have fluctuating expenses where a line of credit is the only way to manage money in and money out. Workers with seasonal jobs can appreciate that.

Best Case Scenarios for Using a Business Line of Credit

A business line of credit can make the difference between success and failure, particularly for smaller business owners who are just getting up and running. If you have to pay cash for everything, funds may run out before you make a profit.

Manufacturers and distribution companies often run on a line of credit since they have to typically wait 30, 60, or 90 days to get paid. Trucking companies and seasonal businesses also use this system to cover expenses and maintenance costs. 

When Not to Use a Line of Credit

If you're already struggling to make monthly payments on other debt, don't use a line of credit. Keep it in reserve until you get everything else under control. You may even want to take out an unsecured personal loan to consolidate everything you owe into one monthly bill.

Think of a line of credit as a reserve fund that you use only for specific purposes, like business expenses or emergency household repairs. 

Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.

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Categories: Personal and Family Finances

Tags: Financial Services, Line of credit, Loans, Personal Finance