What Is A Credit Line and How Does It Work?


When you apply for any type of credit, whether it is a credit card or even a personal loan, the lender needs to be able to determine how much debt you will be able to handle once you are approved, in addition to the debt you already obliged to pay. Is is there before very important for you to have a complete understanding of not only "what is a credit line?", But how this credit line will affect your credit history and associated reports.

Although your past payment history will be taken into consideration as a major factor in determining how much, if any, funding to give you, your ability to repay going forward usually weighs more in the final decision making process. For instance, a FICO score of 750 will certainly be impressive to anyone from what you are asking for a loan or bank card, but if you just changed jobs and now make much less than you did even a few months ago, what you are absolutely approved for might be far less than you had been hoping for.

If you are approved for a large amount, this immediately shows on your reports from all the reporting agencies. How you use it going forward plays a large part in how other companies in the future treat you when you ask for new bank cards, loans, etc.

One thing they look at is how quickly you get close to your limit. Let's say your new card comes in the mail and you have a $ 5,000 limit. If you manage to max this out in a few months, while making only minimum payments each month, this will detract from your FICO score and of course put you in a position where you may start incurring late fees and over the limit fees.

In this type of situation, if you start applying for additional cards, you most likely will either be turned down or you will be offered a much higher interest rate than you want, or a very low limit of perhaps $ 500.

On the flip side, if you get your new card in the mail with the same $ 5,000 limit and you only use it for emergencies, and do not even use it right away, that also plays a major factor in how other creditors will view your overall history when it comes to asking for additional loans. And, when you do finally use it, you pay more than the minimum payment, pay before the due date, and keep your average daily balance at less than half of your maximum available, that also shows everyone risked that you are a good risk and a good customer.

In these situations, your limit will probably be raised without even asking. You might even be offered a lower APR.

When creditors look at your total available credit and then see how much of it you have used, this is important as they determine whether to approve your request for additional funds. If you are close to being maxed out, you might be totally out of luck asking for even more.


Source by Frank Rodriguez

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