• A line of credit can provide some peace of mind.photo checkbox credit image by Aleksandar Radovanovic from Fotolia.com
  
  A line of credit is a loan that may be extended to you from your bank. It is an open-ended loan, which means that you can pay it off but it will remain open for your continued use. A line of credit can be set up as an overdraft account to protect your checking transactions or as a credit line to be used on an as-needed basis. This type of loan will have a payment due each month based on the current balance of used funds, not the entire credit line. This type of loan can be an unsecured loan, meaning that it has no collateral to secure it to the lender in case of default. There also is a home equity line of credit, but you must secure the loan with your home.
  
  

Debt ratios

• While credit and scores are big indicators of how a borrower pays his or her bills, there is a cost for credit reports. Debt ratios are looked at first, since if the borrower's debt level is too high to qualify for a loan, credit doesn't matter. This is one way that banks are practicing risk management. A borrower must be able to afford payments, so his or her income will be assessed. He or she must have two full years of stable employment. Then the monthly payments are totaled and divided by gross monthly income to get the percentage of debts (as compared to income) that the borrower currently carries. (Example: $1,500 monthly payments/$5,000 income = 30 percent). If he or she is over 40 percent, he or she may be denied the credit line. The above example would pass the "test." Each bank or credit union will have their own in-house guidelines.
  
  

Credit and scores

• If the borrower demonstrates that he or she can afford a monthly payment of a line of credit, along with other monthly debt payments, the bank will request a credit report with scores. The accounts listed on the credit report should match what the borrower has listed on the application as monthly consumer debts. The credit scores should be of high quality for an unsecured line of credit, usually at least 720. If there are other debts on the borrower's credit report that he or she did not list on the application, the lender may inquire about the discrepancy or even deny the loan.
  
  

Employment

• The borrower must demonstrate that his or her employment is stable. A newly hired person who still is in a probationary period would be considered "unstable." But once on the job long enough to be past this period, the borrower may be approved for a line of credit as long as his or her past two years of employment history can be verified. Furthermore, the borrower must provide two years of W2 statements and 30 days' worth of pay stubs to prove employment. Verifications may be sent to past and present employers. If the borrower has had more than two job changes in the past two years, it will be questioned.
  
  

HELOC

• In the event the line of credit is a HELOC (Home Equity Line of Credit), usually the same debt ratios as mentioned above will apply and credit and scores will be similar to the above, but the home (which will be liened as a second mortgage) will require an appraisal. Heavy scrutinization of the mortgage payment history will be required. In areas where property values have declined, it is imperative that there be sufficient equity in the home. These HELOCs will not allow for 100 percent of equity to be used, but may go as high as 80 percent.