What is a Line of Credit?

Old-timers may remember a cartoon called Popeye and a hamburger munching character named “Wimpy.” Wimpy would always say “I will gladly pay you Tuesday for a hamburger today,” thus taking advantage of his line of credit with Popeye and his friends. After initially determining a person’s or business’ credit worthiness and income potential, a line of credit is the maximum amount a financial institution will lend them without requiring additional verification.

Individuals have lines of credit in a variety of ways including their home mortgage, auto loan, credit card, student loans and other types of loans. The interest rate, or amount of money charged for being granted a loan, depends on several factors such as they type of loan required, the amount of money borrowed and the credit history of the person borrowing the money.

A line of credit is an important tool to help fund the building of the American dreams. Since most people do not have stacks of cash available to finance the purchase of every type item they would like to own, credit is woven into the fabric of the U.S. economy. If you are interested in buying a home, purchasing a car or even buying a large screen TV now but want to pay for it later, then you need to work on establishing a line of credit for yourself.

Save for Your Future

Credit lines are an amazing tool to build wealth, if used properly. For example, professionals recommend purchasing a home as a way to build long-term wealth. By securing a line of credit in mortgage form, you can borrow the money you need to pay for your home. If you are a renter with monthly debts, you will never see that money again. However by utilizing a line of credit to buy a home and making monthly payments towards that line of credit you are actually not only paying down interest but also the money towards the principal value of the home. When you pay off all the principal, you will then own your home thus adding to your net worth.

About the Author

GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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