Lines of Credit Demystified: Common Misconceptions Vs. Facts

Despite how prevalent the line of credit may be in the financial world, it can be a little confusing for the first-time borrower. They don’t work like the typical personal loan, and not everyone has first-hand experience using them to inform how they borrow.

With all the mystery, you may not realize all the opportunities that a line of credit may offer. But don’t worry — this guide is here to help. Keep scrolling to demystify lines of credit so that you can borrow with intention.

Misconception 1: Lines of Credit are the Same as Credit Cards.

Fact: While the credit card in your wallet may share similarities with a line of credit loan online, they are distinct financial products.

The biggest difference is how you use them. By and large, credit cards are meant for everyday use; you can buy groceries and fill up your gas tank with a credit card. You’ll often earn rewards points for these purchases that you can spend on other items.

An online line of credit, on the other hand, is a safety net. It provides extra cash on standby until you run into an unexpected expense you can’t afford on your own. Let’s say your water heater starts to leak or your taillight goes out — you can draw against your line of credit limit to pay for these unusual and urgent expenses.

Misconception 2: You Need an Excellent Credit Score to Be Approved

Fact: While a good credit score will always help you apply for a line of credit, it’s not always a strict requirement.

Financial institutions consider various factors beyond credit scores, such as income, employment history, and debt-to-income ratio. Some lenders even offer secured loans and lines of credit, where collateral like a home or vehicle can be used to secure the loan.

You may still qualify for a line of credit with these other options if you have less-than-perfect credit.

Misconception 3: A Line of Credit Will Lower Your Credit Score

Fact: If and how a line of credit affects your score depends on your lender’s policies and the way you use it.

A line of credit may contribute to your credit score only if your lender shares account information with the major credit bureaus. Many lenders share this information every month, regardless of your activity. However, some only share negative information like delinquencies and defaults.

If you pay your line of credit late, this could lower your score. But if you use your line of credit responsibly, you shouldn’t worry about how it affects your credit too much.

When borrowers make timely payments and maintain a low balance, it demonstrates good financial management. Such positive behavior helps build a solid credit history, which is crucial for future online loan approvals.

On the flip side, maxing out your limit or missing payments can take a sledgehammer to your score, so it’s important to make prompt payments.

Separating Fact from Fiction

Misconceptions about lines of credit can lead to uninformed financial decisions, so do your best to explore your options carefully before you borrow. The research you put in now can help demystify this helpful financial safety net.