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10 tips for wise use of a Line of Credit

Thinking of home extensions? Buying that new car? Debt consolidation? Paying out your extended credit card balance? If so, you may want to consider a Line of Credit.

A line of credit is relatively cost effective to set up. You would use your current home as security or any other type of acceptable real estate.

These loans typically have terms ranging from 10 to 30 years however, you will find that most banks will allow you to use the facility as an interest only basis for the first 10 years with the remaining term converting to principle and interest repayments. Banks offer these facilities on a variable interest rate so that you will find that your repayments may fluctuate during increasing interest rates environments.

Before venturing into a Line of Credit facility, find the following guidelines:

  1. Always try to set the limit on the lowest loan-to-value ratio (do not extend the limit of the Line of Credit to more than 30 per cent of your home value) this will ensure that you will find it easier to control your spending.

  2. Lines of Credit come with a debit card and a cheque book or linked to your Visa card, try not to use the plastic as it is very tempting and easy to use. Keep the plastic at home! Instead, use your cheque book as you might think twice before writing out a cheque.

  3. Have your salary credited into your Line of Credit facility. This will help you reduce your balance owing and save you interest at the end of the month.

  4. Try not to have your Line of credit fully drawn. You should always have some surplus funds available in case of emergencies.

  5. It is very important to make your repayments on time every time. Maintaining a good credit relationship with your bank is important in case you need future borrowings or need to re-negotiate your repayment terms if you fall into financial hardship.

  6. Read the fine print on your loan contract. Typically, a Line of Credit can be terminated by a bank for no apparent reason. The banks are not required to maintain the facility for the whole of the term should a bank take this drastic action it might compromise your financial position.

  7. Try to limit your purchases to items that improve your net wealth. Use the money for income producing investments, home renovations or improvements. Do not use funds for vacations or buying clothes and other non-income producing ventures.

  8. Note if a lender is unfamiliar to you or you have not heard of this lender before contact the Mortgage Industry Association of Australia to see whether there have been any complaints or actions pending against them or if they are at all members of the Mortgage Industry Association of Australia.

  9. Many borrowers get caught out in using funds to cover for their daily expenses such as bills, groceries and motor vehicles running costs! It is unfortunate however; many borrowers tend to keep their Line of Credit to the limit. You need to exercise discipline and responsibility when using a Line of Credit if not you may lose your home!

  10. Many borrowers use a Line of Credit wisely by consolidating higher rate credit cards, personal loans or other consumer credit arranged by merchants or retailers.

A Line of Credit is very easily obtained these days as all banks offer this type of loan facility. The down side of this type of loan is that many borrowers start with very good intentions and find that it is very tempting to simply overspend on luxury items and soon find that they are deeper into debt and in a worse financial position than before they started a Line of Credit.

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