What is a line of credit?

• A. A savings account with a credit limit.
• B. A fixed-term loan with a set repayment schedule.
• C. A pre-approved amount of money that can be borrowed on demand.
• D. A credit card with a spending limit.

Answer: (C)

A line of credit is a flexible borrowing arrangement that gives you a pre-approved amount you can borrow on demand. You can draw from it up to the credit limit whenever you need funds, and you only pay interest on the amount you actually borrow. You can repay what you’ve borrowed and then borrow again, up to the limit, making it a revolving source of funds rather than a one-time loan.

This differs from a savings account, which simply holds your money and earns interest; it’s not money you borrow. It also differs from a fixed-term loan, which has a set amount, a fixed repayment schedule, and a defined end date. And while credit cards are also revolving uses of credit, a line of credit is a separate borrowing facility with a pre-approved limit that you access as needed, not a card you use for purchases with a monthly statement.