Are you considering making a large purchase, perhaps a house or a car, but already have a large balance on your credit card? Perhaps it’s time to consider taking a line of credit with your bank.
Lines of credit are similar to loans in that customers are pre-approved for a certain amount of money, which they can then extend to themselves when they need it.
“We give lines of credit to clients who have a solid credit rating and have established credit,” says Manny Grewal, an investment consultant for TD Canada Trust in Edmonton, noting that they are available for students as well, who typically need a co-signor.
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“You can make purchases with it, you can use it for investment purposes, consolidation of debt, home renovations, along those lines,” Grewal says.
The biggest difference between a line of credit and a credit card is the interest rate. Interest rates are typically a lot lower than with credit cards. For example, at TD Canada Trust, a Visa card normally comes with an annual interest rate of 19.75 per cent. A line of credit might be the prime interest rate (currently 2.25 per cent) plus two or three per cent.
Not just anyone can get a line of credit, Grewal says, adding that credit cards are easier to get.
“It’s typically harder to give credit to clients who don’t have a lot in savings,” he says.
A line of credit doesn’t necessarily replace a credit card, either.
“If you’re on the road a lot, you can’t book hotels with a line of credit,” Grewal explains. “You need a credit card for that.”
Jack Carr, an economics professor at the University of Toronto, says people often have overdraft privileges, which is similar to a line of credit. With overdraft privileges, a customer can take a specified amount of money out of their account — which they don’t actually have — and pay it back with interest.
“(The bank) will charge me interest at a fairly reasonable rate that is less than a credit card rate,” Carr explains.
“If you’re only going to borrow small sums of money, it’s not going to pay to go through all the hoops to get a line of credit,” Carr adds, noting that it doesn’t do anything for your credit rating. “If you have outstanding balances on your credit rating and you didn’t pay them off, your credit rating is going to go down.”