If you are considering getting a line of credit, it is important to remember that there are three kinds of lines of credit and the way in which they may be paid off differs. Weighing your options will help you get the line of credit that best suits your needs.
If you take out a signature line of credit, most likely your payments will be calculated according to a percentage of what you owe at present. The most common percentage rate is about two or two and a half percent or what you owe.
Let’s use an example to illustrate this point. Think about the fact that you spent $1000 buying a new TV the last month. When the bill comes, you are given two different options: make the minimum payment or any amount greater than the minimum payment.
How is such a minimum fee determined? It is calculated according to a percentage of what is currently owed. For example, in the previous paragraph we gave the example of a $1000 computer. 2% of the remaining balance is $20, making that the minimum fee. However, caution should be exercised due to the fact that if you merely make the minimum payment every month, you are practically just paying interest and it could be a long time before you resolve the debt.
For that reason it is always a good idea to pay as much as you can each month.
If you make a payment of $200 that first month, your outstanding balance of $1000 is reduced to $800. The amount of interest you pay every month is contingent upon the outstanding balance. A good rule of thumb then emerges that you should pay as much of the principal down a month without completely sacrificing your lifestyle. This reduces the amount of interest you have to pay when buying things.
Some lines of credit have an interest only option. This is determined based upon the number of days in your billing cycle, your current outstanding balance, and the interest rate that you are paying.
It is important to carefully weigh your options so as to be able to pay your monthly invoices without problems.
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