line of credit
A flexible borrowing arrangement with a maximum limit, allowing the borrower to draw funds as needed and repay on a revolving basis.
Example
“The business had a $100,000 line of credit from the bank to cover short-term cash flow gaps.”
Memory Tip
A line of CREDIT is like a water pipe — draw what you need, pay it back, draw again.
Why It Matters
A line of credit matters because it provides flexible access to funds when you need them without borrowing a lump sum upfront. Understanding how lines of credit work helps you manage cash flow, handle emergencies, and potentially save money on interest by only paying for what you actually use.
Common Misconception
Many people mistakenly believe that opening a line of credit means you must use all of it or that you will automatically be charged interest on the entire available amount. In reality, you only pay interest on the funds you actually draw and use, not on the unused portion of your credit limit.
In Practice
A small business owner has a $50,000 line of credit from their bank. In January they draw $15,000 to buy inventory and pay interest only on that amount. By March they repay $10,000 of the borrowed amount, so they now owe interest on only $5,000. When they need cash again in April, they can borrow an additional $20,000, bringing their total borrowed amount to $25,000 without reapplying for new credit.
Etymology
Plain English: a LINE (access) to CREDIT — draw from it as needed.
Common Misspellings
Check your credit score free — no impact
Related Terms
More in credit
Other credit terms you should know
See Also
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