A credit line, or line of credit, is a revolving credit offered by financial institutions to their customers with a strong credit score. Under this procedure, an instant credit line, or the credit limit, is assigned by the bank or the credit union. The customer has the discretion to borrow any amount up to that limit. He would be charged interest only for the used portion of the entire sanctioned loan amount.
Any loan, be it a traditional loan, a personal one, or any other loan category, affects and influences your credit score in the long run. Similar is the case with a credit line. How you make payments against your line of credit, the way you use the available amount of the sanctioned loan, etc., affects your credit score figures drastically. Let us find out how.
How do lines of credit affect your credit score?
Credit utilisation highly influences your credit score. How you use your available credit line is responsible for almost one-third of your credit score determination. High credit balances can reduce your credit scores, even when payments are made timely on due dates, as it raises your credit utilisation ratio.
Contrary to this, unused lines of credit tend to improve your utilisation rate, which in turn enhances your credit score. Longer unused credit lines grant a longer average credit history and bigger credit availability as well. Such long-standing credit accounts get rewarded from credit scoring models for using only a small portion of the credit allocated to you.
However, huge amounts of unused credit might portray you as a potential risk in the eyes of some lenders, especially if you do not have a concrete income to back up this credit.
Other factors that influence your credit score
It is highly important to maintain timely payments of your used credit lines as this plays a pivotal role in ascertaining your credit score by credit scoring models. Your credit score gets drastically impacted when you miss your payments on the due date, even occasionally.
Length of credit history
Length of credit history accounts for only 15% of your credit score. A new credit line would initially lower the average age of accounts on your credit report. However, as the credit grows older, it would prove to be beneficial for you.
Credit inquiries affect credit scores by 10%. The lender would review your credit score every time you apply for finances. Access to a credit report would impact your credit score slightly negatively. However, making a few credit inquiries would not make much of a difference unless you keep applying for new credit very often.
A credit line offers the flexibility to borrow, just like a credit card, but with a lower interest rate. However, to be able to get a credit line, you need to have a good credit score. Hence, it is important to keep in mind what influences your credit scores and then act accordingly on those lines.
Also, before you go ahead with a instant personal loan, weigh all factors and ask yourself whether you would be able to afford the timely monthly payments on the due date. Only if you find it to be a good fit as per your financial standing should you go in for the best deals available. It is always better to be cautious about your finances by gathering the right information from trusted sources in advance.
Remember, credit lines influence your credit scores largely, so act according to what works best in your favour.