The Baltimore Sun

If you can, try to put credit lines in place before you need them

Secure credit lines when you don't need them so they're there if you ever do.

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."

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad