Credit Line Calculator

A credit line (or line of credit) is a pre-approved borrowing limit you can draw from as needed. Key differences from a term loan: (1) Draw only what you need, not the full amount. (2) Interest charged only on utilized amount. (3) Daily interest calculation, not monthly. (4) Repay and redraw freely within the limit. (5) Revolving—limit restores as you repay. Example: $50,000 limit, you use $10,000 for 15 days = interest only on $10,000 for 15 days. A term loan would charge on $50,000 from day 1.

Daily interest formula: Interest = (Utilized Amount × Annual Rate × Days) ÷ 365. Example: You use $20,000 at 12% for 45 days. Interest = ($20,000 × 12% × 45) ÷ 365 = $295.89. This is much less than a $50,000 term loan at 10% for 45 days = $616.44. The magic is: pay interest ONLY on what you use, ONLY for the days you use it. Deposit money back and interest stops immediately.

HELOC (Home Equity Line of Credit) is a credit line secured by your home equity. How it works: (1) Based on home value minus mortgage owed. (2) Typical limit: 80-85% of equity. (3) Lower interest (7-9%) since secured. (4) Draw period: 5-10 years (use as needed). (5) Repayment period: 10-20 years (fixed payments). Risk: Your home is collateral—default means foreclosure. Best for: Home renovations, debt consolidation, large expenses. Not for: Day-to-day spending or risky investments.

Credit utilization = (Amount Used ÷ Credit Limit) × 100. It significantly affects your credit score: Below 30%: Excellent—shows you manage credit well. 30-50%: Good—acceptable but room for improvement. 50-80%: Concerning—may lower credit score. Above 80%: Warning—high risk signal to lenders. Even if you pay in full monthly, high utilization reported to bureaus can hurt score. Pro tip: Keep utilization low OR request a credit limit increase (keeping same spending) to improve ratio.

Use Credit Line when: (1) Uncertain how much you need. (2) Short-term or fluctuating needs. (3) Want to pay back quickly and stop interest. (4) Cash flow varies (businesses). (5) Emergency backup fund. Use Term Loan when: (1) Know exact amount needed. (2) Long-term fixed purpose (home, car). (3) Want predictable EMI payments. (4) Lower rate is priority (term usually 2% cheaper). (5) Large one-time expense. Hybrid approach: Use credit line for bridge financing, refinance into term loan for long-term.

Common fees to watch: (1) Annual Fee: $50-500/year for maintaining the line. (2) Draw Fee: 1-2% each time you withdraw. (3) Inactivity Fee: If you don't use it for months. (4) Minimum Balance Fee: For falling below required minimum. (5) Early Termination: If you close account early. (6) Over-Limit Fee: If you exceed sanctioned limit. (7) Late Payment: Miss a payment deadline. Always read the fee schedule. A credit line with 2% draw fee on frequent small draws can be more expensive than term loan.

Business overdraft (Cash Credit or CC account) is a credit line linked to your business current account. How it works: (1) Limit based on inventory, receivables, or business turnover. (2) Withdraw anytime up to limit via normal banking. (3) Interest on daily closing negative balance. (4) Deposits automatically reduce balance + interest. (5) Usually renewed annually with fresh assessment. Cost: 10-14% typically, plus processing fee. Best for: Working capital gaps, seasonal businesses, paying suppliers before customer payment arrives. Essential for most trading businesses.

Credit line CAN serve as emergency backup, but with caveats: Pros: (1) Immediate access when needed. (2) No interest unless used. (3) Don't tie up cash in savings. Cons: (1) Can be reduced/cancelled by bank anytime. (2) Interest rates are high (10-18%). (3) May not work during banking crisis. (4) Temptation to use for non-emergencies. Recommendation: Have 3-6 months expenses in liquid savings PLUS a credit line backup. Don't rely solely on credit line—it's not truly 'your' money.

Smart strategies: (1) Park idle cash in the account—even overnight reduces interest. (2) Time withdrawals—draw on day 1, not day 10 of project. (3) Use credit line for short-term only—refinance long-term needs to lower-rate term loan. (4) Negotiate rate annually—especially with good payment history. (5) Consider HELOC if you have home equity. (6) Avoid draw fees—consolidate small draws into fewer larger ones. (7) Set up auto-deposit from receivables. Every day of lower balance saves money.

Unused credit lines may have consequences: (1) Commitment Fee: Some charge 0.5-1% on UNUSED portion annually. (2) Inactivity Closure: Bank may close after 12-24 months of non-use. (3) Credit Score: Available credit helps utilization ratio—closing hurts. (4) Future Access: May be harder to get again if closed. Recommendation: Make small periodic draws (even if you repay next day) to keep it active. Read terms carefully—some lines cost money just to exist, making them expensive insurance.