Credit union CEO looks at lines of credit versus credit cards and personal loans

Media Contact: Barbara Fornasiero; EAFocus Communications; barbara@eafocus.com; 248.260.8466

Wyandotte, Mich. — December 5, 2024 — Many have heard of a business using a line of credit to fund operations when cash gets tight – but does a line of credit make sense for consumers, too? Michigan Legacy Credit Union CEO Carma Peters looks at the key differences between personal lines of credit versus personal loans, comparing various scenarios and lending options.

A line of credit is much like a credit card, with a maximum limit linked to an account at a financial institution, which allows one to borrow against it. As the money is paid back, that amount is available to borrow against over and over. A fundamental difference between a line of credit and a personal loan is that a loan is a one-time transaction. When the personal loan is paid off, another loan application is required should more funds be needed, while the line of credit is considered a “revolving” loan. Peters explains another important difference.

“Unlike a credit card, which is unsecured, a line of credit can be either unsecured or secured, meaning collateral – such as a home – is required to ‘secure’ the loan in case of default,” Peters said. “To serve as collateral, though, there must be equity built up in the home. Also, if the line of credit is unsecured, the interest rate will almost always be higher – meaning a more expensive line of credit.”

The pros and cons of using a consumer line of credit
  • Pro: A line of credit can really come in handy for emergency borrowing, such as a car breakdown, when someone doesn’t have a savings account.
  • Con: Using more than 50% of your available credit limit will negatively impact your credit score. For a $5,000 line of credit, for example, aim to limit maximum borrowing to $2,500 – unless it is a true emergency.
  • Con: Tapping into a line of credit on a regular basis can be harmful to maintaining a healthy credit score.
  • Pro: Lines of credit can be tied to your checking account, so if you make a mistake (mathematical error in your register or balance) or have an emergency, it can be set up to automatically transfer funds to your checking to avoid incurring any return item fees, or a denied purchase.

To qualify for a line of credit, considerations include credit history, ability to repay, credit score and the amount of unsecured credit requested in relation to annual income. Peters says it’s advantageous to have an existing relationship with a financial institution, such as a credit union, before seeking out a line of credit or other loan options.

“I can’t stress enough that having a relationship with a financial institution makes a big difference in being able to access funds,” Peters said. “We value long-term relationships where a variety of services are utilized, such as a checking account, direct deposit, debit card, car loan, home loan or traditional credit card, because then we know your credit history and credit worthiness to take on new loans.”

About Michigan Legacy Credit Union

Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.

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