Unsecured Line of Credit Usage and Cautions

My views of credit, especially unsecured credit, are particularly negative. However I am a proponent of the unsecured line of credit.  My primary recommendation for the use of an unsecured line of credit is for protection, in other words using it to guard against overdraft. I myself, have and maintain an unsecured line of credit. Through my personal banker, I have obtained an unsecured line of credit in the amount of $5,000. Currently, I am not utilizing it though (zero balance, :)). But let’s do a quick breakdown of this type of credit:

Benefits

Potential Problems

  • Automatic overdraft protection (if I go into the red, an instantaneous transfer occurs from my unsecured line of credit to cover the amount needed, without any fees)
  • Automatic minimum payments are debited from your account, so you are never late or responsible for additional fees (unless you continually run in the negative)
  • Low interest rates (usually prime plus 1-2%)
  • Transfer can be made to your checking account for instant cash without exorbitant fees (I pay only regular interest rates on the transfer, no balance transfer fee or anything like a credit card)
  • No hassle, can be done all online without customer care help
  • Because it is tied to your bank accounts, it can be viewed easily, and in most cases, side-by-side with your deposit accounts
  • The ease of obtaining the money without penalty can lead to excessive spending, be disciplined!!
  • Because of its automatic nature with respect to overdraft protection, balances can go under the radar, and you may be surprised when your bank account is later debited for the minimum payment.
  • Be careful not to count the balance as positive when reviewing your snapshots, it is usually not placed in red, and can look like a deposit account.

I am a big fan of the unsecured line of credit. When used properly, it can save you a lot of money vs miscellaneous credit card fees. It’s automatic protection nature gives you a piece of mind, as well as saving you time when you are in need of a purchase. But let me go on a give a few recommendations on how to establish and maintain a quality unsecured line of credit:

  • Find a quality local bank that is not a national chain. I use Central National Bank here in Temple, TX, which only has offices in Temple and Waco (that I am aware of, there main office is in Waco). It is an independent bank with the ability to make decisions locally, therefore you don’t have to wait for a bean counter in New York to disapprove your request for a line of credit.
  • Connect and utilize a single point of contact for your new bank account and unsecured line of credit. I have a personal banker at Central National Bank.
  • Start slow, don’t ask for a $50,000 line of credit when you walk in the door, build a relationship and let your new personal banker see your spending habits over a few months time. I started out with between $1,000 – $2,000 on my unsecured line of credit.
  • Let the bank make a little interest. When you first start off, consider running a small balance of a couple hundred bucks. Let the bank make a little money, and then ask your personal banker to increase your line of credit.

In summary, an unsecured line of credit can be a great tool to leverage short term projects, provide overdraft protection and generally help give you piece of mind. If you are not already using one, I highly recommend it. The benefits are far more than the use of a credit card, and the problems are few. Just be careful not to overextend yourself, be disciplined, and you can take advantage of your new unsecured line of credit. Stay tuned…

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