When to Say Yes (and No) to a Line of Credit

A line of credit can give your budget a quick boost in a jam, providing you with the financial flexibility to deal with unexpected expenses. But like any financial product, a line of credit isn’t a catch-all solution every time you find yourself short on cash. 

Let’s delve into the reasons why you might say “yes” to a line of credit, and when it’s better to say “no, thank you”. 

Reasons to say YES to a Line of Credit

Here are three reasons why you might appreciate having a line of credit (LOC) in your financial corner:

1. Flexibility

An LOC is a flexible financial account that puts you in the driver’s seat. Once you receive your credit limit, you get to choose when you use it — and how. You can draw against your entire limit to cover one big expense or tap into it to handle several small purchases. 

There are no rules on how many withdrawals you can make, as long as you don’t exceed your limit. Paying these purchases off at every billing cycle will keep your credit limit free, so you can continuously make draws against your line.

2. Convenience 

From start to finish, an LOC can be a convenient financial option, especially when you’re short on time. If you live in Canada, most major banks, credit unions, and lenders provide fast and easy applications over their websites. In a few short minutes, you can share your information and see if you qualify for an online line of credit. 

If approved, you can also manage your line of credit anywhere you get Internet. That means you can make digital withdrawals or payments as needed in a pinch. 

3. Credit Building 

A line of credit can be a great way to build positive credit history in your file. The trick is to pay your bills on time and reduce your utilization ratio. In other words, you shouldn’t let your balance creep close to the total limit available at any given time.

Keeping your balance low is easier when you budget to make more than the minimum payment each month. 

Reasons to Say NO to a Line of Credit

Here are three reasons why you might not use this financial product: 

1. Overspending 

A line of credit gives a considerable bump to your purchasing power. Knowing you can tap into this extra cash at any time can be too tempting to ignore. 

If you use an LOC improperly, you can easily add on debt that you have no idea how to pay off. However, an LOC is perfectly safe if you understand these two general rules:

  1. Only draw against your limit to help with unexpected emergency expenses.
  2. Sit down with your budget to pay off as much as you can, even if it’s an unplanned expense.

2. High Interest Rate 

There is no single LOC that everyone draws against. Everyone receives their own account, and each one might have a different limit, payment plan, and interest rate. Depending on your lender and financial profile, you might get stuck with a higher interest rate than you expected. 

3. Negative Credit Impact 

If your account can build positive credit history, it can also add negative history to your file. It all depends on how you use it. If you improperly manage your account by maxing your limits and paying just the minimum — or worse, you pay your bills late or not at all — these derogatory marks may lower your score. 

Bottom Line:

A line of credit can be a valuable financial tool, offering flexibility and convenience during emergencies. However, it is crucial to exercise caution and consider both the benefits and drawbacks before committing to a line of credit. By making an informed decision based on your financial goals and circumstances, you can leverage the benefits of a line of credit while minimizing potential pitfalls.

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