Line of credit: A valuable financial tool
You have various forms of credit available to you. First
and easiest to get are the consumer credit cards, issued
by retailers, oil companies, department stores, financial
institutions, etc.
Advantages of credit cards are that the terms of repayment
and the amount of credit available are often very flexible.
Disadvantage is that this is the most expensive kind of debt
to carry. However if you pay the amount due each month before
the due date, you will in effect have enjoyed free credit
from the time of your purchases.
Then there are various forms of personal loans available
from your bank. In this case you borrow a specific sum and
pay it back over a specified time. Although not as flexible
as credit cards, Interest rates are generally much lower.
But if you qualify, the best form of credit you can have
is called a "credit line" or "line of credit". This is a
service set up by your bank that allows you to draw the funds
you need, up to a predetermined amount.
You are charged only on the amount you use, not on the amount
available to you. The rate you are charged is linked to the
prime rate and depends on your creditworthiness and/or collateral.
For example, let's say you have $50,000 equity in your home.
Depending on your income and financial situation, you could
probably arrange for a credit line of $25,000 at a rate of
1 or 2 points above prime or even lower if it's secured by
the equity in your home..
If you wanted to then buy a home theater system for $10,000,
you could do so and still have $15,000 in credit available
to you. You would only pay interest on the $10,000. And if
you want to make another purchase using that available credit,
you don't have to reapply. It's simply there for you to access.
If you were to compare the cost of borrowing $10,000 this
way to the cost of using a consumer credit card, you could
save $1,000 or more over a two-year period.
The bottom line: If you qualify for a credit line, it may
pay you to eliminate all your other debt and consolidate
it under your credit line. It could save you thousands of
dollars over the years.
If you'd like to know more about establishing a line of
credit, click
here to find the RBC financial planning professional closest
to you.
Important information about our financial planning services can be found at the bottom of our
homepage.
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