When life happens a line of credit may be the only thing standing between you and a major credit card debt problem. No matter how big your emergency fund, a line of credit can provide you with a low cost buffer for unforeseen spending before you have to use a high interest rate credit card. Unfortunately, lines of credit are typically only available to those who already have good credit, so if you can, you should get one BEFORE YOU NEED IT.

A line of credit is often a better deal than a 6 month 0% interest rate credit card

Why would you want to pay an 8% interest rate on a line of credit when you could just open up a credit card that has a 0% interest rate for six months and roll over your balance? Believe it or not there are actually a few reasons. The first is that a line of credit builds credit history even while you don’t use it. If you decide to tap your line of credit that is five years old in order to pay off a larger than expected credit card balance, your overall credit score wont be damaged and your total available credit will maintain its average age. Now lets go with the 0% interest credit card scenario. If you open a 0% interest rate credit card you will be placing a credit inquiry on your credit report as well as reducing the average overall age of your available credit. This is a clear sign to lenders that you are in need of immediate credit and will potentially make it harder to get credit in the future.

Lowering your credit score doesn’t seem to be a big deal when you could save a lot of money paying no interest for six months; however, if you have to start rolling over balances the costs actually become very close to the rate on a line of credit. Let’s say you have to pay a 3% balance transfer fee when you open a new 0% interest card for 6 months. Over that same 6 month time frame, your 8% line of credit would have only cost you 1% more than your balance transfer. This is because you only pay half of the 8% annual interest over a 6 month period.

Now let’s assume that you don’t get around to transferring your balance to a new card until six months after the 0% interest rate period expires. If the interest rate on your card is 21% annually, you just paid 10.5% interest over the entire year. In that same amount of time your line of credit would have only cost you 8%.

How a line of credit can save you from being stuck paying a high interest rate on your credit card

While there are many people out there who have successfully used 0% interest rate credit cards to save on interest costs, your credit still has to be good in order to open one. Now imagine that your missed a few payments and you are unable to open up a new 0% interest rate card so you can roll over the balance from your 21% interest rate card. If you had a line of credit in the first place you wouldn’t have had to worry about rolling over your debt onto new credit cards, but as it is now you are stuck paying the higher rate.

A line of credit is a great way to build credit history while adding an extra layer of protection to your finances

Having a line of credit doesn’t mean that you cant play around with opening 0% interest rate credit cards. What it does mean is that you can feel safe knowing that you have a source of money to fall back on if and when you are in a situation where you would have to pay credit card interest. Also, don’t forget that a line of credit allows you to draw cash out for free (plus interest) while cash advances from credit cards carry higher interest rates and fees. Make sure to open a line of credit while you still can to improve your financial flexibility!