What is a line of credit and how does it work?

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A line of credit is an arrangement you can make with your financial institution that allows you to borrow money up to a pre-determined limit. As you pay down your line of credit, you can draw on it again, back up to the limit you are allowed. You can withdraw money from your line of credit at any time — by writing a cheque, by withdrawing funds from an automated banking machine (ABM), or by using telephone or on-line banking. You will have to pay interest on the amount you borrow. Usually, you receive a monthly statement that shows your balance, which is the current amount that you owe. You must make at least a minimum payment on that balance every month. Subject to the terms and conditions of your line of credit agreement, you may also pay off part of your balance, or the entire amount, at any time — without any penalty.

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