A bank line of credit is money the bank agrees to lend you, up to a set limit, that you can borrow from whenever you need it
Unlike a loan where you receive a lump sum all at once, a line of credit works like a flexible account. The bank approves you for a maximum amount — say $10,000 — and you can draw from it in smaller amounts as you choose. You only pay interest on the money you actually use, not on the full approved amount. When you pay back what you borrowed, that money becomes available to borrow again.
The bank sets the terms: how much you can borrow, what interest rate you'll pay, and how long you have to repay. These terms depend on your credit history, income, and the type of line of credit. A secured line of credit is backed by collateral (usually a savings account or home equity), so the bank takes less risk and often charges lower interest. An unsecured line of credit has no collateral behind it, so the interest rate is typically higher.
Key Takeaways
- You borrow only what you need from your approved limit and pay interest only on the amount you use, not the full credit line.
- A secured line of credit uses collateral like home equity or savings and usually carries a lower interest rate than an unsecured line.
- An unsecured line of credit requires no collateral but charges higher interest because the bank has more risk.
- The bank can freeze or reduce your line of credit if your financial situation changes or you miss payments.
- You'll need to make at least a minimum payment each month, usually covering interest plus a small portion of principal.
How the money moves when you draw from the line
When you're approved for a line of credit, the bank doesn't hand you cash. Instead, they set up an account linked to your checking account or give you checks or a card to access the funds. You initiate the draw — you decide when and how much to take out, up to your limit.
Once you draw, the money appears in your account (usually within one to three business days, depending on the bank). From that moment, you owe interest on that amount. If you draw $3,000 of a $10,000 line and leave the rest untouched, you pay interest only on the $3,000. As you repay that $3,000, the $3,000 becomes available to borrow again.
Interest rates and how they're calculated
A line of credit usually carries a variable interest rate, meaning it moves up or down based on a benchmark rate set by the Federal Reserve. When the Fed raises rates, your rate rises. When it falls, yours falls. Some banks offer a fixed rate for a set period, then switch to variable.
The bank calculates interest daily on your outstanding balance. If you owe $5,000 and the annual rate is 8%, you're charged roughly $1.10 per day in interest (the exact amount depends on how the bank compounds). You'll see this interest added to your balance each month on your statement.
The interest rate you receive depends on your credit score, income, and the type of line. Someone with a 750 credit score might get 6% on a secured line, while someone with a 600 score might pay 12% or more on an unsecured line.
Minimum payments and repayment terms
Most lines of credit require a minimum monthly payment, usually calculated as a percentage of your balance plus accrued interest — often around 2% to 3% of what you owe. If you owe $5,000, your minimum might be $100 to $150 per month.
You can pay more than the minimum anytime. Paying above the minimum reduces your balance faster and saves you interest. Some lines of credit have a draw period (usually 5 to 10 years) during which you can borrow, then a repayment period (often 10 to 20 years) during which you can only pay back what you've borrowed, not draw new funds.
If you stop making payments, the bank will charge late fees, report the delinquency to credit bureaus, and may freeze your line or demand full repayment when ready.
When the bank can change or close your line
A line of credit is not may provide for life. The bank can reduce your limit, raise your interest rate, or close the line entirely if your circumstances change. This happens most often when your credit score drops, you miss payments, your income falls significantly, or the economy shifts and the bank tightens lending overall.
During the 2008 financial crisis, many banks froze or closed lines of credit even for customers in good standing, because the banks themselves were in trouble. It's less common now, but it still happens. If your line is frozen, you can't draw new money, but you still owe what you've already borrowed and must continue making payments.
Secured versus unsecured lines compared
| Feature | Secured Line | Unsecured Line |
|---|---|---|
| Collateral required | Yes (savings, home equity, etc.) | No |
| Typical interest rate | 5% to 9% | 9% to 18%+ |
| Credit score needed | Fair to good (620+) | Good to excellent (680+) |
| Approval speed | Days to weeks | Days to weeks |
| Risk to borrower | Bank can seize collateral if you default | Damage to credit, possible legal action |
Lines of credit versus other borrowing options
A line of credit differs from a personal loan in a key way: with a loan, you get all the money upfront and repay it on a fixed schedule. With a line of credit, you draw as needed and pay interest only on what you use. This makes a line cheaper if you don't need all the money at once.
A credit card is also a line of credit, but with higher interest rates (usually 15% to 25%) and smaller limits. A bank line of credit typically offers lower rates and larger amounts, but requires more paperwork to set up.
A home equity line of credit (HELOC) is a secured line backed by your home's value. It usually has the lowest rates because the bank's risk is lowest — they can foreclose if you don't pay. But that also means your home is at stake.
Frequently Asked Questions
What's the difference between a line of credit and a credit card?
Both are lines of credit, but a credit card is issued by a card company and typically has a higher interest rate (15% to 25%) and smaller limit. A bank line of credit usually has a lower rate and higher limit, but takes longer to set up and may require collateral.
Can I use a line of credit for anything I want?
Most unsecured lines have no restrictions — you can use the money for any purpose. Secured lines, especially HELOCs, sometimes come with restrictions on what you can use the money for. Check your agreement with the bank.
What happens if I don't use my line of credit?
If you don't draw any money, you owe nothing and pay no interest. Some banks charge an annual fee to keep the line open even if unused; others don't. Check your agreement. An unused line still shows on your credit report and counts toward your total available credit, which can help your credit score.
Can the bank lower my interest rate?
You can ask, especially if your credit score has improved or rates have fallen. But the bank is under no obligation to lower it. You have more leverage if you have other accounts with the bank or if you're considering moving your business elsewhere.
What happens if I can't make a payment?
Contact the bank when ready. Missing a payment triggers late fees, damages your credit score, and can lead to the bank freezing your line or demanding full repayment. Some banks offer hardship programs that temporarily lower your payment or pause interest — it's worth asking before you miss a payment.