Should I Get a Line of Credit If I Don’t Need It?

A line of credit can seem appealing even if you don’t currently need to borrow money But is it a good idea to open one if you don’t plan to use it? Here’s what to consider when deciding whether to get a line of credit if you don’t need it

What is a Line of Credit?

A line of credit is a type of revolving credit account that allows you to borrow up to a set limit whenever you need it. You only pay interest on the amount you actually borrow. Once you repay what you borrowed, that credit is freed up again for future borrowing

Like credit cards, lines of credit let you borrow money, but you have to apply for and get permission from a bank to use a certain line of credit. They often have lower interest rates than credit cards.

Potential Benefits of Opening a Line of Credit You Don’t Plan to Use

Even if you don’t need to borrow money right now, opening a line of credit could be helpful in some ways.

• Emergency fund access: Having an open line of credit could give you quick access to funds in a financial emergency. This could be especially helpful if you don’t have enough savings set aside in an emergency fund.

• Credit boost: Being approved for new credit can give your credit score a small, temporary boost. Utilizing a small portion of the available credit and making on-time payments could further help build your credit over time.

• Lower interest rate: Opening a line of credit now often allows you to lock in a lower rate versus applying when you urgently need money. Rates are near historic lows currently.

• Easier approval: Lenders may look more favorably on an application for new credit when you don’t actually need the money currently. Your approval odds may be higher.

• Building relationships: Getting a line of credit from your bank can help you get to know them better, which could make it easier for you to get other loans in the future.

Drawbacks of Opening a Line of Credit You Don’t Plan to Use

On the other hand, there are also some potential downsides to opening a line of credit if you don’t expect to use it:

• Interest charges: You may need to pay some interest charges even if you don’t use the line of credit. Many lenders charge annual fees and/or inactivity fees.

• Lower credit utilization: Having open access to more credit can lower your overall credit utilization ratio, even if you don’t use the line of credit. This could negatively impact your credit scores.

• Temptation to overspend: Just having an open line of credit may tempt some people to tap it and overspend. This could lead to debt problems if spending exceeds the ability to repay.

• Missed payment risk: Even if you don’t use the line of credit, you’ll have one more account to keep track of. Missing payments would damage your credit.

• For some types of loans, like a home equity line of credit (HELOC), you may have to put up your home or other assets as collateral in order to get the loan. This can put those assets at risk.

• Lower chance of other credit: Opening a new line of credit may lower your chances of approval for other new credit for a while, since you’ve just gained access to more available credit.

Tips for Deciding If You Should Open a Line of Credit

As you weigh the pros and cons, here are some tips that can help you decide if opening a line of credit now is the right move:

• Consider your emergency savings: If you have very little emergency savings, access to a line of credit could serve as a backup until you build up your fund. If you already have several months’ worth of living expenses banked, it’s less critical.

• Think about your spending habits: If you have a hard time limiting spending and end up maxing out your credit cards, avoid unnecessary access to more revolving credit.

• Check terms for fees: Apply only for lines of credit with no annual fee and no penalty for not using the account. Read terms closely to avoid fees.

• Compare to credit card rates: Apply only if the line of credit interest rate would be lower than rates you pay on credit cards, to maximize savings.

• Analyze your credit utilization: Avoid new credit if your credit utilization ratio is already low, as more available credit could lower it further and hurt your scores.

• Consider a small limit: Opt for a line of credit with a low limit if approved. This minimizes temptation and the impact on your credit utilization.

The Bottom Line

Opening a line of credit when you have no immediate need to borrow money can sometimes make sense. But proceed with caution. Understand all terms and fees, and carefully consider both benefits and drawbacks for your unique situation before applying. With the right strategy, an unused line of credit could provide security and flexibility. But it also comes with risks to weigh.