How Does a Line of Credit Work?

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

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A line of credit works by allowing you to borrow funds from a revolving pool.

You can spend the funds continuously so long as you continue making minimum payments and paying down the balance.

Unlike a loan, with a line of credit you only pay interest on funds that you spend.

How Does a Checking Line of Credit Work?

A checking, or overdraft, line of credit is a line of credit attached to your checking account to protect against overdraft charges.

An overdraft LOC allows you to only be charged interest on the overdrawn amount, rather than the high overdraft fees you would normally incur.

How Does a Line of Credit Work? FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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