Line of Credit

A type of open-ended credit that lets you withdraw and borrow money as often as you'd like—up to a certain limit. In some cases, people use their homes as collateral for lines of credit. Lines of credit usually have low interest rates and are very flexible. You could keep withdrawing money out of them as long as you still have money left in the line of credit.

Example

You finally paid off your house and now you have a $200,000 house, mortgage free. You decide to open a $20,000 line of credit so that you have money for a rainy day or for fixing up the house.

With your line of credit, you can take out $20, $200, or anything at all up to $20,000. If you pay it back, you can take out more money—again, up to $20,000. There is an interest amount that you pay, but only if you take out money.

Let's say that you take out $10,000 to fix your windows. The bank may tally up that you owe $200 in interest on that amount. They automatically take the $200 out of your account each month until you pay back the $10,000. Once you've got your house spruced up, you can focus on repaying the $10,000, or you can keep withdrawing money until you hit $20,000.