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Variable Line of Credit

A variable line of credit is a line of credit on which the interest rate is variable. A variable or interest rate changes from month to month.

One common variable line of credit uses the prime interest rate. The prime interest rate is the standard interest rate that banks charge to their best customers. The prime interest rate is usually the lowest interest rate available.

When a variable line of credit uses the prime interest rate the interest rate on the line of credit goes up or down when the prime goes up or down. This can be a good deal because the prime rate is low. It can save the borrower money when the prime rate goes down but cost more when the interest rate goes up.

Drawbacks to Variable Lines of Credit

The biggest drawback to a variable line of credit is that the interest on the line of credit and the cost of the line of credit increases when the interest rate goes up. If the rate of inflation and interest rates are very low this can be a very good deal.

When inflation and interest rates go up the variable rate of interest and the cost of the line of credit will increase. If inflation is high the cost of a variable line of credit can go up as much as 10% or 20%. This can cost a borrower a fortune because it means that the balance of the line of credit can increase as much as 10% or 20%.

Persons and businesses with limited incomes should probably avoid getting a variable line of credit because it might make credit costs too high for them to pay. Those who have a lot of disposable income might benefit from variable lines of credit because they can save money when interest rates are low.

One strategy those with high incomes might adopt is to leave balances on variable lines of credit when interest rates are low and pay them off when interest rates go up. This can give a business or individual some extra money for savings or investment when interest rates are low.

Variable Interest Rates on Equity Lines of Credit

Home equity and property equity credit lines often come with variable interest rates. A homeowner can save money on an equity line of credit with a variable rate.

A good strategy is to pay off balances on lines of credit with a variable interest rate first. Then pay off the balances on mortgages and lines of credit with a low fixed rate. This way an individual doesn’t have to worry about the interest rates going up.

Another strategy is to try and get a variable interest rate pegged to the prime rate. This way you will probably get the lowest interest rate you can.

Refinancing Variable Interest Rates

Those who have equity lines of credit with variable rates can often lock in a low fixed interest rate by refinancing the line of credit. Unlike a variable interest rate a fixed interest rate always stays the same. This can keep interest rates low even when inflation causes interest rates to go up.

Refinancing variable lines of credit can help a homeowner save money. This can help a homeowner free up equity and get more credit to take advantage of.