Whether it’s for repairing an aging car or remodeling an outdated kitchen, everyone needs a little extra financial help now and then. For many people, a good way to obtain that help is with a personal line of credit, a revolving line of credit that requires no collateral and can be used for any purpose.
A personal line of credit can help smooth out those times when expenses might be a bit high, says Sarah Chenven, director of programs and strategic initiatives for Credit Builders Alliance in Washington, D.C.
Borrowers use the money as needed and pay interest only on the amount that is borrowed.
“It can give people a sense of security if they know that they have a personal line of credit available to them,” Chenven says.
How to qualify
Qualifying for a personal line of credit can be as simple as having a checking or savings account at the bank where you are applying, or having good credit history. Making regular deposits, such as having your paycheck directly deposited into your account, helps to demonstrate consistent money management habits.
Knowing your credit history is also important. You can review your history by obtaining a free credit report at AnnualCreditReport.com. By reviewing your report, you can check for any errors and take note of credit issues that need to be addressed.
Those with no credit history can still demonstrate their creditworthiness. Lenders look favorably upon those who have a record of reliably managing their expenses, which you can demonstrate with on-time payments for regular bills such as rent and utilities.
“A bank isn’t likely just going to look at a credit score, but may also underwrite based on other factors. These could include debt-to-income ratio, a listing of expenses and whether you are paying those bills on time,” Chenven says.
Beginning the process
Once you’ve established your creditworthiness, you’re ready to start the process of obtaining credit. Understand why you want the credit and shop around for what suits your needs. “Know what the different financial institutions in your area offer,” Chenven says. “Know what you’re looking for in terms of a product and know what you can responsibly manage in terms of fees, interest rates and payments.”
Obtaining not only your credit history, but actual credit score (which may require a fee) can also be helpful, says Curtis Arnold, author of How You Can Profit from Credit Cards and founder of CardRatings.com and BestPrepaidDebitCards.com. Lenders use different formulas to translate your credit history into a score that can be used to rate your creditworthiness, so there is no single credit score that applies across the board. In general though, looking at your score from any source can give you an idea of where your credit history falls on the scale of creditworthiness.
Keep in mind banks have different criteria for granting credit. The same score that may be denied at one bank may be within the acceptable range for good credit at another bank.
“It’s good to know your score right before you apply for credit,” Arnold says. “Then ask the loan officer: What is your typical credit score range? Knowing your credit score arms you with knowledge [and] knowledge is power.”
Arnold says banks may also have a range of interest rates available, so those who have fair or marginal credit may still qualify. “Talk to the loan department directly,” he says. “Feel them out. Each situation varies.”
Perhaps the greatest benefit of a personal line of credit is the peace of mind it can bring. “Even if you don’t need the money right away, you never know when that rainy day, that emergency, is going to come,” Arnold says. “Having that line of credit as a safety net is a really nice thing to have.” He adds that even with a line of credit, it’s also a good idea to have a rainy day savings account.
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