Various Categories of Lines of Credit
What is a line of credit? It can simply be defined as any economic product in which the length of time in which the debt needs to be resolved is not stipulated. We will now briefly examine the three principal categories and their differences.
When it comes to lines of credit, there is generally no stipulated minimum monthly fee. This makes rapid payment of the principal easier.
Perhaps the most common and versatile category of a line of credit is a credit card. The disadvantage of a credit card is the high interest rate involved. The advantages, however, are that they can be used for any financial need and often offer incentives, unlike the other kinds of lines of credit.
Rewards can include points to a particular company’s products, cash back, plane tickets, or new cars in the case of GMC for these different types of cards. Interest-rate on credit cards will be higher with the other two types of lines of credit and credit cards are not put in a good light due to the balances many people keep on them.
The second type of line of credit is a signature line of credit. This can differ from a credit card because these have a higher limit than a credit card and also have a low interest rate (normally). Many people use a signature line of credit simply for emergencies or if they want to lower the interest-rate they pay on their credit cards.
The final type of line of credit is the home equity line of credit. This will have the lowest interest-rate attached to it because it is secured. What that means is that if you do not pay back the line of credit, the bank has recourse to take the collateral which is your home.
There can be a tax benefit to using a home equity line of credit.
If you are considering taking out a line of credit, it is important to investigate the three categories that were just mentioned and their uses. This will help you to make a wise choice. Remember, you may have several lines of credit at once.
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