A line of credit is an approved loan allowing withdrawals by check or bank card. Credit lines are not set to expire, but they can be reduced or closed at any time by the lender. Most lenders regularly review credit reports to monitor the account holder's creditworthiness. Negative information on credit reports such as judgments, charge-offs and excessive balances can lead to closure or reduction of the credit line.
Various lenders offer credit lines, including banks, credit unions and mortgage companies. Credit limits vary depending on income, credit qualifications and collateral. Unsecured credit lines, which do not require collateral, start at about $500. Secured lines of credit, such as home equity lines of credit, can exceed $100,000, although most people have smaller lines. Home equity loans are tied to equity in real estate, usually a primary residence.
A credit card is an example of a line of credit. Credit cards and other lines of credit often require an annual fee for keeping the account open. There are no other costs unless charges or withdrawals are made. Full-featured bank credit cards such as MasterCard and Visa are popular lines of credit, and some department store and gas station credit cards also feature small credit lines for cash advances.
A signature line of credit is an unsecured account not tied to a credit card or home equity loan. Access is available through checks and debit cards. Credit limits are smaller than those on secured lines.
The Federal Trade Commission warns that credit lines can lead to excessive debt. The agency strongly recommends against using home equity lines for frivolous purposes such as vacations, shopping sprees, used cars and more. Carrying a balance on a home equity line adds debt to the mortgage, increasing the risk of foreclosure during a personal financial crisis.
- Federal Reserve Board: Home Equity Lines Of Credit
- Federal Trade Commission: Home Equity Credit Lines; February 2007
- MSN Money; Lenders Cut Off Home-Equity Tap; Liz Pulliam Weston; February 2008
- Consumer Financial Protection Bureau (CFPB). "What Is a Personal Line of Credit?" Accessed Mar. 28, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Is an Overdraft?" Accessed Mar. 28, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Is a 'Daily Periodic Rate' on a Credit Card?" Accessed Mar. 28, 2020.
Robert Lee has been an entrepreneur and writer with a background in starting small businesses since 1974. He has written for various websites and for several daily and community newspapers on a wide variety of topics, including business, the Internet economy and more. He studied English in college and earned a Bachelor of Arts in liberal arts from Governor's State University.