When Laura Poole planned her wedding 15 years ago, she found she needed a little help to make her big day extra special. So Poole took out a personal line of credit.
Personal lines of credit allow consumers like Poole to establish unsecured, ongoing borrowing relationships with financial institutions.
Thanks to her credit line, Poole could pay for the wedding she wanted. Over the years, she's tapped into the line to pay off high-interest credit cards, cover unexpected car repairs and pay larger-than-expected tax bills.
"It just offers me a little extra flexibility," says the life coach and freelance book editor from Durham, North Carolina. "It's a great option if you have good credit."
A personal line of credit can be a great resource when it's used wisely, says Susan Tiffany, who retired in May from the Credit Union National Association in Madison, Wisconsin, where she served as director of consumer periodicals.
"Think of it as tide-you-over money rather than flat-screen TV money," says Tiffany, who recommends a personal line of credit as a "temporary, stopgap substitute for emergency funds."
However, personal lines of credit also have drawbacks. Interest rates tend to be higher compared with similar products, such as home equity lines of credit. And consumers must be disciplined to avoid overborrowing.
Easy access to money
Borrowers who open a line of credit can tap into those funds as needs arise. As funds are repaid, the borrower can tap into the line of credit again and again without having to apply for new loans repeatedly.
Interest is charged only on the amount of money borrowed. Depending on the institution, consumers may be able to access the money through checks, Internet transfers, ATMs or a local bank branch.
How to get one
Obtaining a personal line of credit typically requires a good credit score and solid credit history. You should check your credit report and credit score before applying for a new loan. Check yours for free at myBankrate.
It's best to apply for a personal line of credit when your finances are healthy, Tiffany says, rather than waiting until you're in dire straits and possibly a little less eligible.
"If you can qualify for a personal line of credit, you're smart to take one out," Tiffany says. "You should set it up when you're in a position to be eligible for one."
Kenneth Alverson, managing director at the New York management consultancy Novantas, agrees that it's best to apply sooner rather than later, since most forms of credit today "are being evaluated and managed more aggressively by banks to limit their exposure."
"Get it before you need it," he says.
A quick survey of banks and credit unions finds that personal lines of credit are available in a variety of amounts and interest rates. San Francisco-based Wells Fargo offers personal lines of credit in amounts ranging from $3,000 to $100,000.
Underwriters are likely to approve borrowers with a strong credit history, a good relationship with the bank and verifiable earnings, says Brent Vallat, senior vice president and head of consumer credit card, lines and loans at Wells Fargo.