A personal line of credit and a credit card are both unsecured open-end ("revolving") credit products. In a nutshell, a personal line of credit is like a credit card without a grace period or rewards, but with better cash advance features. Lines of credit are very common for businesses whereas credit cards are more common for individuals (there are also business credit cards). Based on my own personal line of credit with Wells Fargo and my three credit cards from American Express, Chase, and FIA Card Services (Bank of America), I summarize the differences in the table below. Red indicates inferior product features.

Generally speaking, a credit card is better for purchases. A personal line of credit is better for cash advance. Banks don’t advertise personal lines of credit as much as they do for credit cards. Perhaps that’s why more people don’t know about it.

Because I, like half of all credit card users, and I hope 100% of my readers, don’t carry a balance on my credit cards, I never paid attention to the APRs on my cards. Now that I think about it, I wonder why credit card companies are so much against cash advance. First they give you only 20% of the purchase credit limit for cash advance. Then they charge you 3% cash advance fee plus a much higher interest rate, with no grace period. They obviously see cash advance as more risky than purchases. Right now you can charge almost everything on a credit card. What can you do with a cash advance but you can’t charge as a purchase? I can think of paying rent, paying other loans, and paying taxes, although it is possible to pay mortgage with a credit card for free. What else?

Not all banks offer personal lines of credit (at least they don’t advertise it online). Almost every bank offers Home Equity Loan, Home Equity Line of Credit (HELOC), auto loans, and loans for motorcycle, RV or boat. These are all secured loans. For personal, unsecured revolving loans, some banks basically just push the credit cards. Using my Top 10 Banks list, here’s what I found from each one.

Four of the top 10 banks don’t offer unsecured personal line of credit or at least they don’t advertise it on their web site. Note the top two banks, Bank of America and Chase, are also the biggest credit card issuers. I also checked a few credit unions around me. They all offer the personal line of credit product. Large, popular credit unions like PenFed, Navy Fed, and Alliant CU have it too. I guess by tradition personal line of credit is more common in credit unions than in banks.

Elsewhere on the web:

• Bankrate.com: Borrowing with personal lines of credit

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I submitted the application online. The questions were as expected: name, address, Social Security Number, employment information, income, size of the credit line requested, and the purpose of borrowing. They said a decision typically takes two business hours. I waited all day but I didn’t hear anything. I finally called and they said my application was declined! If you can believe it, they asked me if I would like to be referred to Wells Fargo Financial, their subprime unit. Me? Subprime? No, thank you.

The underwriter said the reason for the decline was that the size of the credit line I asked for was too high for my income. Fine, tell me what you can give me. No, they just flat out declined me. It’s been widely reported that credit card companies are cutting people’s credit limits. They have spared me so far. Ah, the credit crunch finally hit me.

Because having a line of credit linked to a checking account is part of my carefully designed strategy for emergency-proofing my emergency fund, I swallowed my ego and pride and had a phone rep appeal my case with the underwriter. After a few rounds of phone calls, I finally got it approved with the lowest credit line they can give to anybody for that product. It’s an acceptable starting point. I can have them raise the credit limit later after the credit crunch passes.

The phone rep told me the underwriter couldn’t give me a higher credit line because I already have plenty of credit available to me from my three credit cards. The underwriter said if I were to max out on all my credit cards, the required payments would be too high for my income. That actually makes sense, although the credit limits on my three cards are quite modest compared to what others said they had. Perhaps that’s the reason none of the credit card companies cut the credit limit on my cards. I see fellow blogger Sun has over $200,000 combined credit limits from 9 credit cards. When I asked How Long Can You Live On Your Credit Cards? last January, a reader said he or she could live six years just on credit cards. I can live only six months on my credit cards. Those credit card companies are much more trusting than my Wells Fargo underwriter. Maybe the conservative nature of Wells Fargo is a reason why Wells Fargo is a relatively strong bank.

Everybody says you should have your credit limits as high as possible to keep your utilization ratio low and your credit score high. This experience shows that having high credit limits can prevent you from getting new credit elsewhere. Because I just refinanced my mortgage, I saw my credit scores (790). I know they declined me initially not because of my credit scores. It’s an issue of maximum potential debt to income ratio.

For my low credit line, I also had to fax in a bunch of documents: W-2, paystubs, and utility bill. I never had to do it before for any credit card application. It’s a small inconvenience for me to gather the documents and fax them, but I think all credit applications should be done this way. Applying for credit is a serious business. We shouldn’t make it too easy. I do wonder why a personal line of credit is so much more difficult to get than a credit card. A personal line of credit is treated as a real loan and looked at by a real person. Credit card applications are typically decided by automated systems with instant approval. Professor Adam Levitin of Georgetown University wrote in his blog post Credit Card Defaults–Piggybacked Underwriting:

"There is virtually no income verification in the [credit] card industry–all loans are stated income loans (a/k/a liar loans), and we know how well that worked for mortgages (and there’s more temptation to lie about a card as a default won’t cost you the house)."

I don’t know why they do full doc loans for a personal line of credit while they do stated income loans for credit cards. I’m guessing it’s because with a credit card they can price for risk and adjust rates more easily down the road. If any banker reads this, please chime in.

After all these run-ins with the bank, I’m thinking what it takes to establish a relationship with a personal banker at a branch. Instead of calling different departments at different 800 numbers, getting a different phone rep every time I call, and repeating what I said each time, I could let the banker at the branch make the calls for me. I heard that’s how banking was done in the old days. A local banker knew you and served you. Now everybody self-serves online or calls the call center a thousand miles away or across the globe. I know Wells Fargo is known in the industry for relationship banking. Getting help from a banker for a single point of contact will probably make things easier for me. I will inquire when I go into a branch next time.

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Money market funds and online high yield checking or savings accounts are popular choices for where people keep their emergency fund. I keep mine in a money market fund in Fidelity mySmart Cash account. My two recent episodes of emergency showed that my emergency fund was inadequately prepared for real emergencies (see previous posts BBG Communications: $27 for a 1-Minute Phone Call and Credit Card Cash Advance Saved the Day). When I needed money, I couldn’t get hold of it easily. I must find a better way to emergency-proof my emergency fund. How fast can you get money from your emergency fund when you have an emergency?

ACH transfer. When you have your emergency fund in a money market fund or in an online high yield checking or savings account, you access your emergency fund primarily through ACH transfer. On average, ACH transfers take two business days. Some institutions take longer. Some like Fidelity can do it in one business day. There’s usually a cutoff time for the transfer request. Request submitted after the cutoff time is processed on the next business day. If your emergency can wait two business days, you can use ACH. If you think you can deal with all your emergencies that way, you can skip the rest of this long post. What if you need money sooner than that? An emergency that can wait two business days isn’t so much an emergency.

Deposit a check. Money market funds usually have check writing. Online savings accounts usually don’t. If you have a local checking account, you can deposit a check from your emergency fund to your local checking account. You should ask your bank when they will make that check available to you. The answer will likely depend on the size of the check. Wells Fargo told me they can give me cash the next business day if they don’t hold the check, but if I want money on the same business day, they can only give me $100 for my first check deposit on any given day. What if you need more than $100 today?

ATM/Debit Card. Some online high yield savings accounts issue ATM/debit cards; some don’t. Online high yield checking accounts usually do. Plain money market funds like Vanguard money market funds usually don’t issue ATM/debit cards. Brokerage cash management accounts, like Fidelity mySmart Cash, usually do. There is a daily maximum on the amount of cash you can take out with the ATM/debit card. You should know what your daily maximum is. If the institution allows cash advance against the debit card, you should also find out what the daily maximum is for cash advance. For Fidelity mySmart Cash, it’s $500 per day from an ATM and $2,499 per day through a cash advance. You can withdraw from an ATM 24/7/365. Cash advance usually can happen only when banks are open. If your institution charges a fee for either ATM withdrawal or debit card cash advance, you should find out what the fee is. Fidelity mySmart Cash does not charge a fee for either ATM withdrawal or debit card cash advance.

Wire Transfer. Wire transfer can happen on the same business day. It usually needs prior setup. You can preauthorize wire transfers from your emergency fund to a local checking account. It can take a week or two for them to set that up. After that, when you need the money, you just request a wire transfer online or by phone. Wire transfer on-the-fly usually won’t work, due to security precautions. Both the outgoing account and the incoming account may charge a fee for the wire transfer. There’s also a cutoff time for wire transfer requests. Requests received after the cutoff time cannot be done until the next business day. The incoming account may also need time to "see" the wire. Fidelity charges $15 for an outgoing wire. Vanguard does not charge. My Wells Fargo PMA checking account does not charge for incoming wires.

Savings Account at a Local Bank. If you have your emergency fund in a savings account at a local bank, you can just walk in and do your withdrawal immediately. You don’t have to bother with ACH, cash advance against a debit card, or wire transfer. The problem with this setup is that a savings account at a local bank usually doesn’t pay much interest. You give up yield for the immediate access to cash. If you are willing to use a local "rewards checking" account that pays a good interest rate but requires 10-12 debit card transactions in a month, you can have both high yield and immediate access to cash. I’m not convinced rewards checking accounts will last in the long run.

Credit Card Cash Advance. I did a cash advance against my credit card when I was short $300 for a mortgage refinance. It was done within minutes for a $10 fee. It works if the amount needed is small. If I needed $5,000, the 3% cash advance fee would be $150. That’s too expensive.

Line of Credit. A line of credit through the same bank where you have your checking account works like the credit card cash advance without the cash advance fee. When you need money, you request a transfer from the line of credit to your checking account. It can be done online, over the phone, or in a branch. The transfer can happen immediately. If you own a home, you can get a Home Equity Line of Credit (HELOC) which is secured against your home. Or you can get an unsecured personal line of credit. The interest rate on a HELOC is lower, typically around prime rate, currently 3.25%. The interest rate on an unsecured personal line of credit is much higher, close to the rates you see on credit cards. Some banks charge an annual fee for the line of credit.

After weighing all these options, I decided to apply for an unsecured personal line of credit with Wells Fargo, where I also have a checking account. This will provide emergency cash needs that cannot wait two business days for an ACH transfer. For having a PMA checking account package with Wells Fargo, the annual fee on the line of credit will be waived. I chose an unsecured line over a HELOC because a HELOC will complicate my mortgage refinance in the future. For emergency purpose, the interest rate doesn’t matter much. Borrowing $5,000 from a line of credit at 20% interest rate will cost me $5,000 * 20% / 365 = $2.74 per day. I also set up preauthorized wire transfer between Fidelity and Wells Fargo. If I need a large amount for more than a few days, I will just do a wire transfer for a $15 flat fee.

Companies do fire drills every so often. We should also do fire drills on our emergency fund. Test the whole process from time to time and see how soon and how much you can get from your emergency fund. Do you know the answers to these questions:

1. How long does it take for an ACH transfer from your emergency fund to your checking account? What is the ACH transfer request cutoff time? What is the maximum amount you can transfer per day?
2. Can you write checks from your emergency fund? How fast can you turn that check into cash?
3. Do you have an ATM/debit card from your emergency fund? Do you know the PIN? Can you get cash advance against the debit card? Is there a fee? What is the daily withdrawal limit?
4. Do you have pre-authorized wire transfer set up between your emergency fund and your checking account? What is the cutoff time for a wire transfer request? How long does it take from the time you request the wire to the time you see the money in your account? What’s the fee for sending and receiving a wire?
5. Do you have a line of credit from the same bank where you have a checking account? What is the maximum you can transfer from the line of credit? How do you request a transfer? How long does the transfer take? Is there a fee for the transfer? Is there an annual fee for the line of credit?

Be prepared before a real emergency comes.

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