Are lines of credit only for the wealthy? The answer may surprise you.

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You might have heard that lines of credit are only for the rich, but that's simply not true. Lines of credit are more accessible than you might think— even if you don't have a perfect credit score or a six-figure salary.

Lines of credit can be useful financial tools for an array of purposes including home renovations, emergency expenses, or to fill temporary gaps in your cash flow. It may surprise you to know that many everyday Americans can qualify for a line of credit, despite the misconception that they are only offered exclusively to the wealthy.

Let’s jump into the truth about lines of credit and whether or not one might be a good fit for you.

Do The Rich Actually Borrow More?

First, let’s address whether the rich actually use credit products like credit cards and lines of credit more than the average person. In 2019, data provided by the Federal Reserve showed that wealthy individuals do in fact borrow more money than low income earners. 

The data shows that the top 1% of the population holds a significant 4.6% of all the debt, while the bottom 50% of the country only accounts for 36% of the outstanding debt (although, total debt does account for more than simply lines of credit).

Today, those who make exceptionally high incomes often have different credit habits than the average American. For example, they tend to care less about interest rates. Compare that to recent data from CNBC that shows 46% of typical credit cardholders carry debt from month to month, up 7% from the prior year.

While wealthier individuals may borrow more, lines of credit can remain a valuable tool for all. They can provide quick access to funds for a variety of needs, from medical expenses to home improvements, offering flexibility and helping improve financial health when used responsibly.

What Exactly is a Line of Credit, and How Does it Work?

Think of a line of credit as your financial backup plan. It's an agreement you strike with your bank or lender which allows you to borrow money up to a predetermined amount whenever you could use the lift. Lines of credit bear similarities to credit cards, but there can be distinct benefits to LOCs such as potentially lower interest rates and direct access to the amount borrowed.

When you receive approval for a line of credit, it means you now have a reserve of funds at your disposal, often ready at a moment’s notice. The beauty lies in its structure— interest accumulates solely on the amount spent, not your entire credit ceiling. With every repayment, you can replenish this reserve, ensuring it's ready for the next time you need to dip into it. This revolving feature grants a flexibility edge over traditional personal loans that demand immediate interest on the total borrowed sum and require reapplication each time you borrow.

At Varo, we're dedicated to making financial products like lines of credit accessible to the everyday person. Varo Line of Credit¹ offers the same borrowing power of a traditional line of credit, but without the recurring interest. Instead, pay a one-time flat fee for each sum borrowed and pay funds back over a 3 to 12 month period (depending on amount borrowed). This differs from a personal loan, as our line of credit does not require reapplication for future borrowing , assuming your financial situation hasn’t changed.

The Different Line of Credit Options

The landscape of lines of credit can have varying types, each appealing to different needs and circumstances.

Unsecured Personal Lines of Credit: Tailored to individuals, these rely solely on your financial history for approval, sidestepping the need for collateral. They can be a flexible solution for covering unexpected expenses or bridging income fluctuations without putting your assets at risk.

Secured Lines of Credit: Offering typically lower interest rates, these credit lines differ from unsecured LOCs by guaranteeing the lender's money against assets that you own. The HELOC is a prime example, leveraging the equity in your home to provide financial flexibility for renovations, major purchases, or debt consolidation.

Business Lines of Credit: Crafted with business entrepreneurs in mind, these can either require collateral (secured) or not (unsecured), depending on the agreement. They often grant business owners the agility to navigate operational expenses, invest in growth opportunities, or even buffer against seasonal variation in cash flow.

Note: Although Varo is always looking for ways to provide our customers with new and exciting financial offerings, we currently do not offer business lines of credit. If you’re looking for an unsecured personal option, check out Varo Line of Credit  ¹. For a secured credit product, look into the Varo Believe Credit-Builder Card ².

Why Choose a Line of Credit?

One of the best benefits about lines of credit is their flexibility. You can borrow as much or as little as you need (up to your credit limit), and you can often choose how to repay it with a minimum monthly payment or more significant amounts to pay down your debt faster. Plus, interest rates on credit lines can be typically lower than credit cards, making them potentially more enticing for managing cash flow and unexpected expenses.

Of course, like any form of borrowing, you want to be aware of responsible use of personal lines of credit. It’s important to only borrow what you can afford to pay back and stay on top of your payments to avoid possible damage to your credit score. When used wisely, however, credit lines can be a valuable tool for everyday people, not just the wealthy.

Read more: The pros and cons of lines of credit

Who Can Actually Get a Line of Credit? Factors That Affect Eligibility

Now that you know the basics of how lines of credit work, you might wonder if you could qualify for one yourself. Eligibility for a line of credit depends on a few key factors:

• Credit scores and history: Lenders often assess your credit score and historical financial behavior to evaluate how reliable you are in repaying borrowed money on time. Your credit report is one source they might use to get a sense of your creditworthiness.

• Income and debt-to-income ratio: Your income level, along with how much debt you currently carry, might also play a role in the lender’s decision. This debt-to-income calculation helps lenders decide if you’re capable of repaying the credit line.

• Collateral (for secured lines of credit): If you’re applying for a secured line of credit, such as a HELOC, lenders will usually evaluate the value of your home or other assets to be used as collateral.

If you have a high credit score, a steady income, and a low debt-to-income ratio, you'll generally be more qualified for a line of credit with favorable terms. But what if your credit isn't perfect or your income is lower than average?

Often, people with lower credit scores or incomes may find it challenging to obtain lines of credit. Data shows a higher denial rate for individuals within the "poor" (300-579) and "fair" (580-669) credit score ranges on the FICO scale. This can create a difficult cycle of needing to improve your credit score to qualify, while being unable to get approved for lines of credit due to poor/fair credit history.

Luckily, if you need help improving your credit, there are options for you.

Options for Fair and Poor Credit Scores

• Varo Line of Credit: If you have limited credit history  but are still looking for a personal line of credit, Varo Line of Credit could be a good option. This product starts with lower borrowing amounts, allowing you to increase your credit limit over time with healthy Varo banking activity³ and as your  credit improves.

• Secured credit cards: These work like regular credit cards but require a cash deposit which then becomes your spending limit. This allows you to build or rebuild credit without going into debt to do so. One example of this is the Varo Believe Card ².

• Credit-builder loans: These loans are designed specifically to help people build credit. The loan amount is often held in a savings account, and you make monthly payments to help build your payment history.

• Co-signers or guarantors: If you have a friend or family member with good credit who's willing to co-sign your application or act as a guarantor, it can increase your chances of approval and help you get better terms.

While having a strong credit profile and income can make it easier to access lines of credit, it's not always the only path forward. By exploring different options and improving your credit over time, you can work towards qualifying for the financial tools you need to thrive. Everyone needs to start somewhere.

Read more: How to get a line of credit with bad credit

Applying for a Personal Line of Credit with Bad Credit

If you're considering applying for a line of credit but you're worried about your credit situation, here are some steps you can take to help improve your chances of approval.

Understand Your Credit Score

First, take an honest look at your credit. You are entitled to one free credit report each year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Obtain copies of your credit report from all three bureaus and thoroughly review them for accuracy. 

Look for any errors or inaccuracies that could be dragging your scores down, and dispute them if needed. Make a note of any negative items, like late payments or collections accounts, so you can explain them to lenders when asked.

Read More: How to Dispute Credit Report Errors

Improve Your Credit Score

In addition to the credit-building options we discussed earlier for fair and poor credit scores, consider taking these steps to help improve your credit before you apply.

• Paying your bills on time, every time. Payment history is often the biggest factor in your credit health, so even a few late payments can do noticeable damage.

• Reducing your credit utilization by paying down credit card balances. Aim to pay down your credit usage to less than 30% of your available credit each month, although keeping your utilization under 10% is often better.

• Avoid new credit applications in the months leading up to your line of credit application. Each new application may lead to a ding in your score, so it may be advisable to minimize these when possible.

When you're ready to apply, do your research. Look for lenders that specialize in working with borrowers with less-than-ideal credit. These lenders may be more willing to consider factors beyond your credit health, like your income and employment history.

Read more: How lines of credit can affect your credit score

Accessing the Credit You Need Without Recurring Interest

At Varo, we believe that everyone deserves access to the financial tools and support they need to get ahead of their finances. That's why we've designed products with accessibility and inclusivity in mind.

Meet Varo Line of Credit¹, designed to provide access to affordable, flexible borrowing with a suite of benefits not seen in most personal line of credit offerings.

• Amounts range from $600 to $2,000

• One-time flat fee (no recurring interest)

• No late fees or prepayment penalties

• Fixed monthly payments over the course of 3 to 12 months (depending on amount borrowed) 

Get started with Varo today or click to learn more about Varo Line of Credit!

^{1 The Varo Line of Credit is designed to help customers with unforeseen expenses with monthly payments, no late fee, no prepayment penalties, and no interest. To be eligible, your accounts must maintain a positive balance. Minimum monthly deposits, average daily balances, and other eligibility requirements apply. Once qualified for Varo Line of Credit, you will be assigned a credit limit from $600 to $2,000. A one-time fee is added to your borrowed amount, early repayment of your advance does not reduce the one-time fee. Your credit limit may fluctuate from one advance to the next based upon a variety of factors. You may only take one Varo Line of Credit out at a time. Your eligibility information and/or credit limit is always available to you in the home screen of your Varo app. Checking offer eligibility will not impact your credit score. If you are eligible and choose to apply for an offer, we will pull your credit and your credit score may be impacted.}

^{2 Varo Believe is a secured credit card designed to help you build credit; however, a variety of factors impact your credit and not all factors are equally weighted. Building credit may take time and Varo Believe may be able to help when you consistently make on-time payments.}

^{3 Healthy account balances generally means maintaining a positive balance. When you keep higher available balances between deposits, you build towards better account health.}