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baltimoresun.com

Get a credit line before you need one

By Lorraine Mirabella | lorraine.mirabella@baltsun.com

January 21, 2009

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Christopher Parr counts this among his basic rules of financial planning: Put your credit lines in place when you don't need them.

"When you do need them, you may have trouble qualifying," says Parr, a principal with Financial Advantage Inc. in Columbia. "If you've lost your job and want to set up a credit line, you don't have proof of income."

People with adequate income, good credit and at least 20 percent equity in their homes may want to consider opening a home equity line of credit as a safety net in the event they do end up losing a job or need a quick infusion of cash, experts say. Consumers who are not over-leveraged with credit card debt might want to take advantage of a low-interest offer on a new credit card account.

But doing so requires discipline, experts say. These credit lines should never be used as a first resort in emergencies if you can tap savings. Consumers need to guard against taking on more debt than they can handle. After all, with a home equity loan, your house is on the line as collateral and the banks could foreclose.

"This is not a time to be relying on borrowed money," said Greg McBride, a senior financial analyst with Bankrate.com.

Home equity lines work in much the same way as a credit card, allowing credit up to a certain limit that must be paid back once you start using the line. In some cases the interest paid is tax-deductible.

But know that the low interest rate you get when you open the line could rise; it is variable and tied to the prime rate.

Parr cautions those who can qualify to use lines of credit wisely. A homeowner can benefit from, say, finishing a basement or updating a kitchen. "But if you use your equity line for a Super Bowl ticket or dinner, those events will be long gone, and you'll be paying on it a long time."


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