A line of credit can be a valuable tool for financing projects, emergency expenses and repayment of higher-interest debt. However, using them wisely is crucial to ensure they remain a helpful resource for you rather than a source of additional debt.
Here’s how lines of credit work, their impact on credit scores and the best strategies for managing them.
What Is a Line of Credit?
A line of credit is a flexible form of borrowing that allows individuals to access a predetermined amount of funds from a financial institution. Unlike traditional loans, where you receive a lump sum of money, a line of credit provides you with a credit limit from which you can draw funds as needed.
How Does a Line of Credit Work?
Lines of credit function similarly to credit cards in that they have a revolving credit structure. Borrowers are only charged interest on the amount they use. As the borrowed funds are repaid, the available credit limit replenishes. This flexibility makes lines of credit an appealing option for managing fluctuating expenses and emergencies.
Paying Off Debt with A Line of Credit
One strategic use of a line of credit is to consolidate and pay off high-interest debt. By transferring high-interest credit card balances or loans to a line of credit with a lower interest rate, individuals can reduce their overall interest payments and simplify their debt management.
Does A Line of Credit Impact Your Credit Score?
A line of credit can impact your credit score both positively and negatively. When used responsibly, a line of credit can boost your credit score by demonstrating a history of timely payments and responsible borrowing. However, maxing out your credit limit or missing payments can negatively affect your credit score.
Paying Off a Line of Credit
To pay off a line of credit, you must make regular payments based on the terms agreed upon with your lender. These payments typically consist of both interest and a portion of the principal balance. You must make at least the minimum payment each month to avoid penalties.
When To Pay Off a Line of Credit
If you've used it for a specific purpose, such as debt consolidation, your goal may be to pay it off as soon as possible to minimize interest costs. Conversely, if you're using it for ongoing expenses or emergencies, maintaining it as a financial safety net can be prudent as long as it remains within the limits of responsible borrowing.
Debt Help and Credit Counselling in Ottawa and Across Ontario
If you’re struggling with mounting debt and find yourself unable to make your credit payments, D. & A. MacLeod Company Ltd. can help. We offer credit counselling services that provide strategies to pay off your debt and take control of your finances.
Contact us today to book a confidential consultation with a licensed insolvency trustee.