We live in a complex world and hence, it can be said that unexpected expenses can pop up out of nowhere. You never know when your car breaks down, or you have a medical emergency. If you have nothing to support you financially in these situations, it could be a disaster for you. However, in these situations, having a safety net can be a lifesaver.
One way to create a financial safety net is by having access to a credit line. Here, in this article, we will understand more about credit line, importance of emergency funds, and how you can use it responsibly to avoid getting into financial trouble.
What is a Credit Line?
A credit line, also known as a line of credit, is a type of loan that allows you to borrow money up to a certain limit. It is a different process from a traditional loan where you receive a lump sum upfront. With a credit line, you can borrow as much or as little as you need up to the maximum limit provided by the lender.
How Does a Credit Line Work?
Let’s understand it this way – suppose you have a credit line of ₹5 lakh. This would mean you can always borrow money up to ₹5 lakh from your lender. However, you do not have to borrow the full amount in one go. You can borrow in parts as and whenever needed, whether for car repairs, hospital bills, etc. You can borrow whatever you need and leave the rest of the credit line untouched. You would now only pay interest on the amount you borrow, not the entire credit limit.
How You Can Use a Credit Line as a Safety Net?
Now let’s discuss how credit lines serve as emergency fund solutions.
Imagine you are in a medical emergency, got admitted in a hospital, and later on, get hit with an unexpected medical bill of ₹3 lakh. If you do not have enough savings to cover it, it can be a problem for you. But you can always tap into your credit line if you have one. Now if you have a ₹5 lakh credit line, you can easily borrow ₹3 lakh that you need to pay the bill. This can provide you with peace of mind knowing you have financial support to fall back on.
Benefits of Using a Credit Line
Credit line serves as a financial safety net, as mentioned above. But below are the benefits that would help you understand it’s importance:
Quick Access to Funds
In emergencies, time is of great value and with a credit line, you can access funds quickly, often within a few business days, compared to other forms of borrowing that may take longer to process.
Flexibility
Unlike a traditional loan with fixed monthly payments, a credit line offers flexibility in repayment. You can choose to pay back the borrowed amount in full or make minimum payments, depending on your financial situation.
Cost-Effective
As in a credit line you only pay interest on the amount you borrow, it is certainly a cost-effective option if you wish to manage short-term financial needs. Moreover, the interest rates on credit lines are often lower than those on credit cards.
Builds Credit
When you resort to the responsible use of a credit line, you can help build your credit history and improve your credit score over time. This would eventually make it easier for you to qualify for loans and credit cards with better terms in the future. Isn’t that what you look forward to?
Also Read: When Should You Use a Credit Line?
Tips to Use Credit Line Responsibly
There is no doubt that a credit line can serve as your financial backup plan in emergencies, it is important for everyone to use it responsibly. Here are some tips for you:
- Always borrow only what you need. Just because you have access to a certain amount of credit does not mean you should borrow all of it.
- Do have a repayment plan. Calculate how much you would need to pay back each month and make sure it fits within your budget.
- Ensure to avoid using a credit line for non-essential expenses. Always reserve your credit line for true emergencies such as medical bills or car repairs.
- Always monitor your spending and keep track of how much you borrow from your credit line and how quickly you repay it. Avoid falling into the trap of borrowing more than you can afford to pay back.
