Personal line of credit – a great financial tool!

Financial stability requires the strategic use of financial products. Whether you’re shopping around for the perfect bank account or taking out a loan to pay down debt. When used correctly, financial tools help make your journey easier. 

But there’s one financial tool that’s often overlooked: personal lines of credit. 

Here’s what you need to know. 

What are personal lines of credit? 

A personal line of credit, also known as a PLOC, is a credit account given to a borrower (you) by a financial institution. Typically, lines of credit can be used for anything the borrower needs. Since lines of credit don’t come with cards, you’ll need to do transfers online or in-person. You could do it through snail mail as well. 

Like any credit product, personal lines of credit are subject to interest charges, monthly payments and corresponding late fees, and impact your credit score. 

Personal line of credit vs. credit card 

Personal lines of credit and credit cards have a lot in common! The biggest difference is that PLOCs don’t come with cards. Which also makes it easier to curb impulse spending. 

The second biggest difference is that lines of credit typically have lower annual percentage rates. Also known as APR, the lower the annual percentage rate, the less you can be charged interest. 

What are personal lines of credit for? 

Personal lines of credit can be used for almost anything you need. The most common uses include: 

Emergency funds: Personal lines of credit are there for sudden car repairs, unexpected trips and anything else life throws your way. Plus, because PLOCs don’t have cards, there’s far less chance of running up the balance through impulse purchasing. That means in times of emergency, you’ll likely have a lot more credit available than you would on a credit card.

Large purchases: Much like credit cards, you can use your PLOC to make a large purchase that you pay down over time in small, manageable chunks. It’s the perfect option when you need a new laptop, costly equipment, or just want to keep your cash on hand. And, because PLOCs typically have lower interest rates, it’s often cheaper to put purchases on them than traditional credit cards. 

Building credit: PLOCs are a great first tool to help build credit. Like any credit product, making your payments on time, not having consistently maxed or near max credit lines, and having the account for an extended period of time can all reflect positively on your credit report. A common technique that you can use to build credit with lines of credit and credit cards alike is by setting up automatic payments to pay off or pay down your account balance each month. 

Overdraft protection: Personal lines of credit are a great option for overdraft protection — especially if you prefer to leave your savings accounts untouched. This offers peace of mind should your debit card balance drop lower than you expect. 

The downsides of personal lines of credit 

Every financial tool has a drawback. Here are the downsides to PLOCs. 

Fees: Depending on the financial institution, lines of credit can incur cash advance fees, transfer fees, applicable overdraft fees, maintenance fees and more. Always inspect the fee section of a new credit product. Additionally, seek a reputable financial institution that has your best interests in mind — like OCCU. 

Repayment period: A repayment period is when you can no longer access the available credit on your line of credit until you’ve paid the balance down. Not every PLOC has a repayment period. Ask about it when applying for a PLOC. 

Raising the limit isn’t always possible: Increasing the credit limit on a personal line of credit might be easier said than done. Depending on the financial institution, a borrower may have to close the account and open a new one with a higher limit. 

Closing thoughts 

Personal lines of credit are a great financial tool with predictable drawbacks. They’re especially good tools for people who take financial planning seriously as it allows them to cover the cost of large upcoming expenses. 

Learn more. Explore your PLOC options with OCCU today!