A line of credit refers to the total amount of money a creditor is willing to extend to a customer. The amount is determined by a number of factor including a person’s credit worthiness and income.

When a line of credit is opened, the customer may or may not be required to make a set initial withdrawal. Usually pre-printed checks are issued against the credit line. The borrower will issue checks much like a personal checking account, to pay bills, consolidate debt, or make purchases.

Borrowers have the flexibility to use any amount of their available credit line, and as they pay down their balance the credit becomes available for them to use again. They may draw upon any available amount of credit within the terms of their loan.  If used wisely, a credit line can serve as many loans over the course of its years.

Lines of credit are usually established for a set number of years, often 10 or 15. The credit line will remain open for the borrower to use as they need. After the term of the line of credit expires, the lender may require or demand that the loan be paid in full. In some cases, the loan will convert to an installment loan until it is paid in full.

A line of credit may be extended at a fixed or variable interest rate, based on credit worthiness and the type of loan. Interest is usually charged only on the amount of money that is borrowed from the line, as opposed to a traditional loan where interest is paid on the total amount of the loan. Some lines of credit require the borrower to pay a yearly maintenance fee.

Lines of credit can be a valuable asset when building or remodeling a house, making home improvements, consolidating bills, or running a business. It allows for large amounts of fluid funds to be available at the borrower’s discretion. The minimum payment is based on the loan terms and outstanding balance. The borrower may repay the loan immediately, or over a long period of time.

A line of credit may be extended in other forms as well, including cash and business loans.

Overdraft lines of credit are established to protect the borrower’s accounts from being overdrawn. Funds from some types of overdraft lines of credit may also be transferred from the credit line to the borrower’s checking account at their discretion.

Lines of credit may also be in the form of credit cards, installment loans, and demand loans.

Large lines of credit may be issued as a home equity mortgage, or second mortgage, using a borrower’s home as equity.   Business lines of credit may be secured with business assets or potential earnings.