A Line of Credit Is a Reservoir You Pay to Tap

Instead of a check, the banker slides over a ceiling: "Twenty thousand approved — draw what you need, when you need it." That standing offer is a line of credit, and the meter runs only on what you use.

A line of credit is an approved borrowing limit you can tap, repay, and tap again. Interest accrues on the outstanding balance rather than the whole limit, though fees can apply either way.

A credit card is the version most people already carry — the same revolving engine, dressed for retail. Personal, business, and home-equity lines run that engine at larger scale.

Draw, repay, redraw

Say a business holds a $20,000 line and draws $5,000 for inventory. Interest runs on the $5,000 while the untouched $15,000 waits, still available under the account's terms.

Repay $2,000 of principal and available capacity climbs back to $17,000. That revolving structure is what separates a line from a loan, which arrives once and gets repaid on a fixed path.

Minimum payments during a draw period are often interest-only. The balance stays alive until you go after the principal on purpose.

What the flexibility is for

Lines fit needs with uncertain size or timing — lumpy business cash flow, a renovation priced in stages, a backstop behind thin months. You're paying for access, not for a lump sum.

The same open door invites trouble, though. Balances that revolve without ever touching zero turn a convenience into permanent debt.

Costs beyond the rate

Annual, draw, maintenance, or inactivity fees can run even in months when little interest is due. Variable pricing is common too, so the starting rate isn't a promise.

The credit limit itself isn't guaranteed forever, either. Lenders can trim lines or freeze new draws under conditions written into the agreement.

When the house is on the line

A home-equity line pledges your house as collateral, which buys a lower rate and raises the stakes. Business and personal lines come secured or unsecured, priced to match.

The CFPB's financial terms glossary defines the moving parts.

Before you open a line, read the fee table as closely as you read the rate.