When we talk about ways to build credit; it’s the opportunity to discuss the advantages and disadvantages of using a line of credit.
A line of credit is a way of borrowing which is very flexible. It provides the money you need, when you need it. Its real benefit comes when we do not know exactly how much money you want, or when we will really need. This is actually the money that is available at all times, “just in case”. In this way, you pay interest on the borrowed funds only when it is used.
Margin differs significantly from a traditional loan where you stop paying interest only when the loan is repaid in full after the agreed period of time.
In the case where you would need cash, you can also withdraw funds directly to the ATM. This option is more advantageous than using a credit card.
Advantage 2: Flexible repayment
You can choose to pay more during the month, without limitation or penalty. Obviously you can imagine this is really an intention. This debt will melt like snow in the sun!
Advantage 3: No fee
The money is available, and margin costs nothing until you do not use it. It pays to use, and you only pay interest charges.
Obviously each has its downside. Let’s talk about disadvantages. The line of credit has the defects of its benefits, and more. If you do not know how to use or how to manage it, you can easily fall into large traps and get to live on credit. After all, there is the word “credit” in its name, it should awaken instincts! As in everything, or almost, you must exercise discipline and common sense when you decide to use its margin.
Disadvantage 1: Ease of access
Yes, this problem is very close to advantage 1 cited above. One can easily fall into the trap and use its line of credit to “supplement his income.” The problem is that very soon we find ourselves living beyond our means.
We should not use a line of credit when the situation lends itself really. The line of credit is used optimally when it is not known how much money will be needed and when. This can be very dangerous because almost all impulsive spending can fit in this category! It must therefore be wary. Some use their line of credit as an emergency fund.
Disadvantage 2: Variable interest rate, unsecured
With a line of credit, the interest rate is not guaranteed, unlike a conventional loan where the interest rate is fixed and where we know in advance the amount of reimbursement. In many ways, we can simply “forget” a traditional loan once it has incorporated in its repayments to financial routine. With a line of credit it depends on its bank. It can change the rate at its discretion, it is sufficient to notify you by letter one month in advance.
Disadvantage 3: Far flexible repayment
It overlaps with the advantage number 2, but be aware that without discipline it is easy to get into debt quickly and without realizing it. With a line of credit we may decide to pay the interest on debt, and therefore not to repay the principal.
Pay only the interest on margin can lead to very dangerous situations. Margin account may increase slowly to cap credit limit. With a line of credit; it is essential to make regular repayments of capital in order to avoid financial problems.