Line of Credit

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Consumer Line of Credit

There are several types of consumer lines of credit available to the average person today. A consumer line of credit is a set amount of unsecured made available to an average person for everyday spending.

In an unsecured line of credit no collateral or security is required. Instead the consumer is expected to pay the line of credit back with interest. A home equity line of credit (HELOC) is a secured line of credit because equity is required as security.

The interest rates charged on consumer lines of credit are generally much higher than those on secured lines of credit such as a HELOC. Lenders charge a higher rate of interest because they take a much bigger risk when they make an unsecured line of credit available.

Credit Cards

The common consumer line of credit is one you probably already have a number of: a credit card. A credit card is simply a mechanism that allows a person to make use of a line of credit for consumer purposes.

The credit limit on a credit card is a line of credit. In a line of credit you sign an agreement that makes a certain amount of credit available to you. You are obligated to pay that credit back after you use it. The credit card issuer will charge you interest on that credit and limit the credit available to you if you don’t pay or use up the credit.

The credit cards issued by department stores and other businesses are lines of credit you can only use at that particular retailer. The stores issue these cards because they limit you to purchasing from them.

Other Lines of Consumer Credit

Many online and catalog retailers will make lines of credit available to consumers. It is often common for such outlets to give you a person several hundred dollars worth of credit when they open an account. The retailer gives a person this line of credit in hopes they will use it and start doing business with them.

A bar tab is another common consumer line of credit. The bar owner gives drinks to regular patrons on credit and keeps a tab of it. She does in expectation that the patrons will pay her back later on.

There are store credit plans as well one of the best known is layaway. Under a layaway plan a person a store sets an item aside until a customer has come up with the money to pay for the item. Many layaway plans require a customer to pay something upfront.

Stores that allow people to purchase items on payment plans are also extending lines of credit. The difference is that they provide use of an item instead of credit.

A classic example of this is furniture stores that allow people to buy items with no money down or no payments for a year. The store is extending credit to these individuals to get them to buy.

Banks also offer lines of consumer credit in the form of checking and cash lines of credit. These are lines of credit attached to checking accounts that can be used for consumer spending. They often come with credit cards or the ability to use a check card as a credit card.

Drawbacks to Consumer Line of Credit

The biggest drawback to most consumer lines of credit is the amount of interest charged on them. Most consumer lines of credit come with very high interest rates. Some credit cards can have interest rates of 20-30% while the consumer credit offered by banks can have a 12% interest rate.

It is generally cheaper for a person to pay all the costs of a purchase up front than to use a consumer line of credit. Those who may not have the money to pay for a purchase may have to take advantage of a consumer line of credit. In such a case a person should pay it off quickly to avoid the interest rate.