With responsible use, a savings secured line of credit can help you establish or improve your credit history. You need a strong credit score to qualify for a loan or even rent an apartment. Likewise, good credit can help earn you a lower interest rate. Having a low score — or no score at all — can put you at a disadvantage in achieving some of your financial goals.
A savings secured line of credit can help you build credit to achieve your goals.
What Is a Savings Secured Line of Credit?
"A savings secured line of credit is a revolving line of credit with a variable interest rate that's secured by your savings account," explains Jackson Benefield, Vice President of Equity and Direct Product Management at Regions Bank. "You can borrow as needed, up to your limit, then pay those funds back and draw again."
Here's how it works:
When you're approved for a savings secured line of credit, your bank gives you access to a pool of money that you can use to pay for minor expenses up to an established amount. In exchange, the bank holds funds in your savings account as collateral. When you pay back the money and close your line of credit, the hold on your savings account is lifted; until then, you can continue borrowing and repaying money.
"If you wanted a $5,000 line of credit, we'd make sure you had at least $5,000 in your savings account, then we'd put a hold on those funds and issue you a line of credit," continues Benefield, who says you can obtain savings secured lines of credit with as little as $250 and as much as $10,000 in a savings account.
What Are the Benefits?
A savings secured line of credit can be attractive for many reasons, Benefield says. Major advantages include:
- Flexibility: You can use your line of credit for whatever you need — a monthly bill due before you receive your paycheck, an emergency car repair, or even a vacation.
- Interest accrual: When you use your savings secured line of credit, your savings stay in your account, continuing to earn interest.
- Quick approval: Banks typically make a decision on applications within a couple of hours; with a conventional loan or line of credit, a decision could take days or even weeks.
- Competitive interest rates: When banks issue secured credit, the availability of your collateral, to the bank, means they are taking on less risk. As a result, they may offer more favorable interest rates than they would with unsecured credit.
- Generous credit criteria: Savings secured lines of credit typically have less stringent underwriting criteria. As a result, individuals can often qualify even if they have no credit or weak credit, from bankruptcy or other circumstances.
What Are the Disadvantages?
- Small credit amounts: Because of the relatively low balances, savings secured lines of credit typically cannot be used for big-ticket purchases.
- Limited access to savings: Once you take out a savings secured line of credit, your savings are held by the bank until you pay back the line of credit.
Ultimately, Benefield says, a savings secured line of credit can be a safety net for people who need cash flow or a steppingstone for those who want to work on improving their creditworthiness.
Of course, you're responsible for paying back the borrowed amount as well as the interest accrued. So it's essential to manage what you borrow responsibly.
"The intent of a savings secured line of credit isn't to help you go out and make a major purchase you can't afford," Benefield says. "It's to give you easy access to funds when you need them, and help you build or rebuild your credit profile by borrowing and paying back relatively small amounts on a regular basis."
