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If you’re approved, a line of credit lets you access cash on demand. You can borrow up to a set amount and you won’t pay interest until you actually borrow.
If you haven’t saved up for an emergency fund yet and want to prepare for unexpected expenses, a line of credit can give you the peace of mind you need. But some lenders may extend lines of credit only to people with solid credit. So if you have poor credit, you may have trouble getting approved for a line of credit — or getting favorable rates if you are able to get approved.
While you may be able to get approved for a line of credit with low credit scores, that doesn’t necessarily mean you should. There may be other options for you like a secured line of credit, a personal loan or payday alternative loan — but remember, some of these options can come with serious drawbacks.
What is a line of credit?
If you’re approved, a line of credit allows you to borrow money as needed up to a predetermined amount. You’ll make payments and pay interest based on your outstanding balance if you borrow money from the line of credit.
Some lines of credit charge annual fees or a fee each time you borrow — so make sure to read the terms and conditions carefully before you apply for one.
Lines of credit are similar to credit cards. You’ll have a credit limit, and you’ll also have minimum payments due each month and interest based on your outstanding balance. But with a bank- or credit-union-approved line of credit, you typically borrow money by writing a check or transferring money into your checking account online, rather than using a credit card.
Pros and cons of a bad credit line of credit
Getting a line of credit has its advantages and disadvantages.
Pros of getting a line of credit
If you already have a line of credit available, you can get cash when you need it, up to a certain amount. This is why it may be worth applying for a line of credit, even if you’re not sure when or if you’ll need the money. Instead of waiting and applying for a loan later when you realize you need the money, if you have a line of credit already, you may be able to access the money you need on the same day.
You may also be able to use a line of credit to build your credit. If you’re approved for a line of credit and don’t borrow the entire amount available to you, you may lower your credit utilization rate, which can help improve your credit scores. But take note: Applying for a line of credit may negatively impact your scores since the lender will initiate what’s called a hard inquiry. Your credit could also take a hit if you need to borrow a larger amount from your line of credit.
A line of credit may be a cheaper option than getting a personal loan, especially if you don’t access it very often. Since lines of credit charge you interest when you carry a balance, you shouldn’t pay interest if you’re paying your balance on time and in full.
Cons of getting a line of credit
If you have bad credit, the interest rate you’ll pay on a line of credit may be much higher than what you’d pay if you had strong credit. And that’s if you can find a lender who’ll approve you for a line of credit — many only grant them to people with good credit. If you shop around at multiple banks or credit unions, you may be able to get a better idea of what options could be available for you.
If you make only the minimum payments on a line of credit, you’ll extend the life of the debt and increase the amount of interest you pay in the long run. Borrowing on a line of credit could increase your credit utilization ratio, which could negatively affect your credit. And your credit will also take a hit if you can’t make payments on time.
Some lines of credit come with extra fees or a fee each time you use. It’s important to read the fine print, so you know what you’re getting into.
Alternatives to a bad credit line of credit
A line of credit isn’t always the only option when you need to borrow money and you have bad credit. Let’s look at some other possibilities.
Payday alternative loan
Payday loans provide fast cash, but they’re expensive and risky. But there is another option — a payday alternative loan, or PAL, from a federal credit union. These small-dollar loans can offer a quick way to bridge short-term cash needs. To apply for a PAL, you need to be a member of a credit union for at least a month. So if you think you may need a payday alternative loan in the future, it’s worth checking out which credit unions offer these loans and applying for membership. Just remember that you must meet certain requirements to join a credit union, which can vary depending on how a credit union is organized.
Peer-to-peer lending is an alternative to traditional borrowing options. Peer-to-peer lenders allow borrowers to connect directly with individual lenders who fund loans in small increments.
There are platforms that connect borrowers and lenders, so you may be able to get a personal loan even if your credit scores need improvement. But you’ll likely pay a higher interest rate than someone with good credit.
Credit card with a low APR
Another option is simply to apply for a credit card. It may be cheaper to shop around and apply for a low-interest credit card than to take out a high-interest line of credit. Remember that getting approved for a credit card with bad credit can be difficult, you won’t know your APR until you’re approved and the card can come with additional fees.
You may also be able to apply for a personal loan directly from a lender. Consider shopping around for lenders that may be willing to consider people with less-than-stellar credit for personal loans.
Lines of credit have a lot of advantages, especially if you can secure favorable interest rates and low fees. They can help borrowers bridge short-term cash needs.
But a bad credit line of credit may be more costly for you than other lending options. Payday alternative loans, personal loans, peer-to-peer loans, and low-APR credit cards may help you stay on top of your finances while you work on improving your credit.