Credit cards aren’t the only way for individuals and businesses to build credit. In fact, unsecured lines of credit can be used as a great way to not only fund your life and projects, but to build your credit score without the hassle of plastic cards burning a hole in your wallet. But what’s a line of credit anyway?
A line of credit is a merger of a traditional loan and a credit card: you’re granted a certain limit of funding that you can draw from for whatever you need, whenever you need it — not unlike a credit card limit. You can get personal lines of credit or a business line of credit (if you own your own business, it leverages the credit and financial history of your business instead and is used for business purposes); you can also get them in secured lines (they’re leveraged with collateral like your house, car, or other valuable asset) or unsecured (there’s no need for collateral though the limit is often lower, has higher interest, and requires a higher credit score, usually of at least 700).
While there’s plenty of different types of lines of credit, let’s explore some uses for unsecured lines of credit that can help you accomplish your goals, whatever those may be.
1. HOME RENOVATIONS
One of the most common uses for a line of credit is remodeling your house. Whether you need your roof replaced, updating your kitchen or bathroom, or adding to your curb appeal with some stellar landscaping, you can use an unsecured line of credit to fund any of these projects.
While you can certainly use an unsecured line of credit to accomplish this, if you’ve paid down on your house for a few years and have some equity squared away, you can also use a secured home equity line of credit (also known as HELOC). Compared to an unsecured LOC, a HELOC carries much lower interest rates since it’s pegged to your home’s equity and offers higher limits — usually about 75% of your home’s appraised value less the amount you still own.
No matter what you choose, getting new flooring or buying new kitchen appliances is much easier than it might have previously thought.
2. FINANCING MAJOR EVENTS
Life is constantly rife with ups and downs and plenty of events that might leave you and your wallet worried. A personal line of credit can also help with a variety of major events such as paying for your children’s weddings, moving costs if you decide to relocate to a new town, or even taking an exotic vacation to someplace you’ve always wanted to go yet never could.
3. INCOME SECURITY
If you’re a contractor who finds themselves often playing the waiting game on clients filling invoices, a line of credit can give you much-needed stability when your income is anything but stable. Especially when your clients (like government contracts or large companies with bureaucratic billing departments) pay on a 30- or 45-day cycle, having a line of credit to tap into while you’re waiting can keep your head above water.
Of course, there’s also other options such as accounts receivable financing that might be useful to you, but a line of credit can be used for this purpose. It’s all up to you — after all, it’s that independence and freedom of choice that got you into self-employment anyway, right?
4. EMERGENCY FUNDS
Just as life can be filled with fun and adventure, there can be some less fun expenses that crop out of nowhere. Whether it’s an unforeseen medical emergency, repair that’s needed, or the unfortunate timing in a billing cycle where everything comes due at once and you’re still waiting on your paycheck, a line of credit can help cushion you from the universe’s unmerciful blows.
5. CREDIT CARD REPLACEMENT
For those who don’t like credit cards, a line of credit (even an unsecured one) can offer better control and interest rates than your standard credit cards. Making sure you pay back the money you use regularly without maxing out your limit can even help build your credit. And unlike a loan, you only pay interest on the amount of money you use, not the entire line of credit.
You still might want to have a credit or debit card handy for online purchasing, but this method is especially handy if you prefer a cash-only existence.
6. OVERDRAFT PROTECTION
Similar to our point on emergency funds, sometimes paying bills all at once can take a toll on both you and your bank accounts. A line of credit at the same financial institution as your checking accounts can act as overdraft protection on the off-chance you accidentally draw more than you have. Even if everything goes to plan, if someone finally cashes that check you wrote a month ago, that unforeseen draw is now padded and you can avoid those nasty overdraft fees.
7. BOOSTING BUSINESS AND OPPORTUNITIES
Whether you want to go the personal (if you’re self-employed) or professional (if you have a brick-and-mortar or at least an LLC) route, lines of credit can be used for financing business projects large and small. Need help covering advertising costs or have to hire a freelancer for an ad-hoc project? Perhaps you need a new piece of equipment after an unfortunate breakdown of the machine you already have. Whatever the reason, lines of credit can help you still reach your business goals and maximize your potential.
These are especially useful for sole proprietors or those just starting out who don’t have the credit scores or work history necessary to secure a traditional business loan. Since the Great Recession of 2008, trying to get your foot in the door of a bank for a small business loan is a job all its own. But a personal line of credit can still give you the boost you need without the headache.
RISKS TO KEEP IN MIND
Of course, lending money isn’t without risks if you’re aren’t responsible with your line of credit. Make sure to make your payments regularly and on time and do your best to not tap into the entire line (ideally, use less than half so your credit continues to build). Failure to do so could result in banking fees or, in cases of absolute neglect, being taken to collections.
However, if you make sure to use your line of credit wisely and responsibly, you don’t need to worry about the worst-case scenario. After all, it might be worse to be caught in a situation where you have no money or means to cover unexpected costs. A line of credit at least provides peace of mind for those unfortunate circumstances.
Interested in learning more about lines of credit? Make sure to contact us today for more information!