What's a credit line and when is it a better option than credit cards

A credit line is a type of unsecured loan that you can draw on when the need arises, for up to four times your monthly income, or more if you make over $120,000 annually.

Also known as a personal line of credit, you can borrow from the available credit limit of your credit line account until the credit limit is reached. 

Whatever amount you borrow from this credit facility will count towards your unsecured debt limit, currently capped at a maximum of 12 times your monthly income.

Why is a credit line significant? To answer that, we’ll have to look at its unique features.

Read on to learn more about the advantages of credit lines, who would best benefit from having one, as well as when it’s appropriate to use it over credit cards. 

Advantages of a credit line 

1. Flexible credit withdrawal and loan tenure

Unlike a personal loan, you don’t have to lock in your total loan amount or decide on your tenure at the point of borrowing.

A credit line can be particularly useful for those who need to borrow  but aren’t exactly sure how much they would require.

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2. Daily interest charges apply to the amount drawn 

With a credit line, you will only incur interest charges on the amount you’ve drawn.

As always, you’re encouraged to borrow only what you need, nothing more, nothing less.

Think of a credit line as a solution for your short-term borrowing needs. 

That said, keep in mind banks typically charge fees for opening a credit line as well as annual fees to maintain your credit line account. 

3. Flexible repayment options 

You set your own rules when it comes to repaying the amount you’ve borrowed.

You can choose to pay the minimum payment amount (usually 2.5 per cent to 3 per cent of the outstanding balance), make a few separate payments over a span of several months or even clear your outstanding balance in days or weeks without incurring extra fees. 

An early repayment fee typically applies when you pay off your debt quickly ahead of time.

Go with a credit line you won’t have to deal with such fees. 

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4. Lower interest rates than credit cards 

At approximately 20 per cent per annum, credit lines have relatively lower interest rates than credit cards, which typically charge around 28 per cent per annum.

If you are strictly considering between credit lines and credit cards, it should be a no brainer which option is more cost-effective.

When to use a credit line over credit cards? 

A credit line can come in handy when you foresee the need to borrow cash multiple times and want a convenient, flexible facility to draw from.

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It can be especially useful if you need a bridging loan or if you aren’t exactly sure how much you would need to borrow.

Remember, interest rates will only apply to the amount you’ve drawn from your credit line account. 

Also, there’s no need to deal with multiple loans with a credit line.

All your transactions are recorded under a single credit line account and you are allowed to borrow from the same credit line account, up to your given credit limit.

This will make tracking as well as payments easier on your end. 

That said, one needs to be disciplined to avoid over-borrowing and getting into mounting debt with such easy access to cash.

Besides the potential to spiral into debt, an overlimit fee that ranges between $40 to $50 could apply if you bust your credit line limit.

If you need a convenient facility that you can easily access for your short-term borrowing needs, credit cards are not the answer.

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To be clear, credit cards are designed to be fuss-free modes of payment for users.

They double as a rewards enabler for those who play their cards right to earn credit card rewards on their purchases as well. 

With such high interest rates that compound on the daily post-due dates, credit cards are never a good idea if you need a loan to tide things over.

They are incredibly expensive if you see them as a loan facility.

This article was first published in SingSaver.com.sg.