It is nice knowing your personal line of credit is available in the case of emergency, protecting you from any unexepected financial hardships. I often get asked however how much you can rely on a personal line of credit and what if any circumstances could lead to your personal line of credit being shut down. Could your lender simply shut down your line of credit when you need it most? Yes they can, but the answer runs deeper than a simple yes.
It is true that personal lines of credit are much like credit cards. You have a credit limit with a personal line of credit, just like a credit card. You can borrow what you wish, up to your credit limit just like a credit card. You will only pay interest on your current balance and yes there are minimum payments just like credit cards. Personal lines of credit are also a form of revolving credit just like a credit card is, meaning that as you pay off the balance you can continue to use the account. There is not fixed date for the account to close, that is a choice for either you or your lender.
Your lender will likely have a clause or a few clauses in the contract or agreement you sign when you open the line of credit which spells out the reason or reasons in which the lender could shut down your line of credit. Such a clause will likely grant the lender the right to close down your line of credit at any time for any reason. Yet this should not worry you, it is just legal terms allowing the lender complete wiggle room in the event of any unfortunate events that could occur. Lenders do not just shit down accounts for no reason at all, you have to give them just cause for them to consider doing so, after all lenders are in the business to make money, they do not make money with closed accounts.
The top reasons for a lender closing down a personal line of credit are as follows:
Missed Payments
Just like a credit card, banks offering lines of credit are not likely going to look favorably on missing payments. If you miss several payments and still have credit left on your account the lender may terminate your account to protect themselves against any further loss. To avoid this always make at least the minimum payment. Do not skip payments and never be late with payments as besides risking your account it can and will impact your credit score as well. You can also end up owing large fees and penalty fees for late or missing payments which is never fun.
Your Bank
If your line of credit is through your bank or credit union, keep your accounts in good standing. Do not show troublesome signs such an non sufficient funds often. Also you bank can do a “set off” in regards to your personal line of credit, meaning if your checking account is showing signs that you are financially stressed the bank can transfer funds from your saving or checking account to pay off the line of credit and then close down the line of credit without even asking you.
Use the account
If you do not wish the account closed, it is highly suggested to use it at least twice a year. Banks sometimes clear out accounts that are viewed as a detriment, and accounts that do not generate any money not are used are viewed as such often time.
If you follow the above you should not overly worry about your bank closing your line of credit without warning.
