Avoid Credit Trouble: How to Manage Your Line of Credit Wisely

A line of credit could offer flexibility and financing when you need money to bridge a financial gap, pay for unexpected expenses, achieve important goals and more. It is typically a lower-interest alternative to high-interest credit cards, but it’s important to use it wisely. Offering easy access to funds and flexible repayment terms, using a line of credit requires some financial discipline.

What is a line of credit?

A line of credit allows you to borrow money up to a set limit. You can use all or some of available credit for your financing needs – it’s there when you need it. Once you withdraw funds from your line of credit, you will be required to make minimum monthly payments. With many lines of credit, these payments cover only the interest. While these payment terms make carrying a balance easier from a cash flow perspective, it’s important to also chip away at the borrowed amount (referred to as the principal) – otherwise, you could be carrying that balance indefinitely.

Secured vs. unsecured lines of credit

Lines of credit are available in two forms: 

• A secured line of credit uses an asset – such as your home or investments – as collateral. Because the lender has something to fall back on if you don’t repay, they could offer lower interest rates and higher credit limits compared with other types of lines of credit. 

• An unsecured line of credit is another borrowing option where you can access funds up to a set limit without using any property or assets as collateral. Because it’s “unsecured”, lenders rely more heavily on your creditworthiness – such as credit score and income – in their approval process. An unsecured line of credit can have different eligibility terms and carry higher interest rates, but can still be useful depending on the amount you need to borrow and whether you have collateral.

The difference between a line of credit and a credit card

Lines of credit and credit cards work similarly, as they both offer available credit to the borrower, but they also are distinct types of lending products. 

• Most credit cards have an interest rate upwards of 20 percent, while interest rates on a line of credit are typically lower.

• The two can work together to help you manage your cashflow. A credit card does offer convenience, as you can’t use a line of credit at the cash register. With that convenience comes typically higher interest, and therefore it can cost you more to carry a balance. If you can’t avoid carrying a balance, moving it to a line of credit can save you money in the long term. See what your line of credit payments might look like with this calculator.

How does a line of credit affect your credit score?  

What is a credit score? Your credit score is a good indicator of your financial health and reflects your ability to borrow money and repay it responsibly. It’s one of the key tools that banks, credit card companies or other institutions use to determine whether you qualify for credit. The way you use your line of credit will be monitored by the two major credit bureaus in Canada, Equifax and TransUnion.

Factors that could impact your credit score include your payment history (e.g. avoiding making late payments), how much of your available credit you are using, the length of your credit history, and how frequently you are applying to new credit, among others. It’s always a good idea to stay on top of your financial health and check your credit score. 

Understanding how access to credit can affect your credit score can help you stay on top of your finances. To find out what your credit score is for free, use the RBC Credit Check.

Mistakes to avoid with a line of credit 

A line of credit could be a valuable tool in your financial toolbox and help you create sound financial habits. It can be a flexible option for financing big purchases, such as renovations, and also to cover emergencies. But to avoid common pitfalls, here are some mistakes to avoid: 

• Borrowing too much. Only borrow what you can comfortably repay. Borrowing too much can put your credit at risk, as you could end up with a high balance for an extended period of time. When you withdraw from your line of credit, it is wise to have a repayment plan in mind.

• Late payments. Missed payments can impact your credit score and cause your balance to ballon because of compounding interest. Setting up automatic payments is an easy way to make sure your minimum payment is covered on time, every time.

• Maxing out your available credit. When the amount you borrow is a high percentage of your credit limit, it can indicate to lenders and credit organizations that you’re a high-risk borrower. Instead, keep a threshold in mind – a good rule of thumb is to borrow less than of your available credit to maintain a strong credit score. 

• Not checking your credit score regularly. Regularly checking your credit score is a good practice, even if you have great credit. A quick scan of your credit history can show you the health of your credit and can help you spot any fraudulent activity. 

• Not knowing how much interest you are paying. If your line of credit has a variable interest rate, the rate will rise and fall as the Bank’s prime rate fluctuates. You should be able to see your current rate in your online banking or on your paper statement. 

A line of credit can be a useful tool to help manage finances, but without some know-how, you could find yourself in unwanted credit trouble. Continue the conversation by booking an appointment or visiting a branch today and talking to an RBC financial planner. They can help you stay on top of your credit history and your line of credit to ensure that you are using it to your advantage.

To apply for a Royal Line of Credit, call 1-866-704-7126 to speak to an RBC credit specialist or visit a branch.