Financial, Legal, & Realty

GuaranteedCreditGroup Share What a Line of Credit Is and How It Works

4 minute read

When buyers attempt to make a large transaction in the United States, they will often undergo an extensive review process. One of the most important factors that will impact their ability to complete the purchase will be their credit standing. Hence why this market is the cornerstone of the entire financial industry in the nation.

For a lot of new buyers, however, things like credit scores, lines of credit, and credit approvals might be a foreign concept. After all, learning the ins and outs of such a complex field requires a lot of time. Well, the best starting point to acquire the necessary knowledge will be with lines of credit. Thus, what exactly are credit lines and how do they work?

What Counts as a Line of Credit?

Credit lines are an essential part of someone’s credit standing. They represent the type of account where the buyer has the right to withdraw and use a certain amount of money. There is usually a limit on the amount that they have access to, and it is determined whenever someone first opens their credit line. For instance, when a person gets approved for a credit card, they are considered to have established a new credit line. If their spending limit on it is $1,000, they will have access to funds up to that amount; while some companies allow for users to overdraw their line of credit, doing so tends to carry penalties and fees. So, sticking to the credit line maximum threshold is the best course of action.

Credit cards are not the only types of accounts that qualify as lines of credit, though. Companies that monitor someone’s spending will consider nearly any type of debt, regardless of whether it is a loan, credit card, or something else. The only criterion that must be satisfied is that the buyer maintains a legal responsibility to repay whatever amount they owe.

How Does One Qualify for a Line of Credit?

As per the company that specializes in providing its customers with credit, GuaranteedCreditGroup, one must meet the financial institution’s guidelines to receive approval. This is where the process can get quite tricky as every single provider has a different set of rules. For example, some banks only work with consumers who have a good or very good credit score, multi-year credit history, and low income-to-debt ratio. Others, however, might not be so selective as their requirements are usually more user-friendly.

The reason why the conditions vary is that they directly impact the interest rate that comes with the line of credit. If someone meets the strict requirements that were mentioned above, they will prove that they are financially responsible, and the interest that they will need to pay on the credit that they use will be much lower. If, however, someone has a short credit history that is accompanied by a low credit score, which is usually the case, they will probably be forced to pay an enormous annual percentage rate, or APR.

The Relationship Between the Credit Score and Lines of Credit

As mentioned, credit lines are one of the driving forces of someone’s credit standing. People who have no accounts will usually have no credit history. Hence why it is so important to start applying for accounts early in life and let the average credit age grow.

For users who have things like loans, credit cards, and similar, the complex process of building credit can begin. To be successful, the first thing that buyers must understand is the relationship between various credit lines and the user’s overall standing. According to GuaranteedCreditGroup, the following are three of the most important factors that one must consider:

  • Utilization rate.
  • Age of the account.
  • Percentage of on-time payments.

– Utilization
Utilization rate simply stands for how much of the total credit line the buyer uses from month to month. A general rule of thumb is to try and stay under 30% as credit bureaus view anything that goes over that figure unfavorably. However, this metric is updated regularly and only takes into account the utilization at the time of the most recent update. A borrower can often safely use 80-90% of their credit so long as they pay this back down to around 30% soon after. Utilization is also measured across all lines of credit simultaneously, so while one credit card may be at 60% of its limit, having other cards at 10% of their respective limit could keep total utilization below the 30% threshold.

– Age of account
While it is self-explanatory, the age of the account just shows how long the buyer has had the credit line for. The longer that it has been in good standing, the better.

– Percentage of timely payments
Paying the minimum monthly balance on time is easily the most important factor that the buyer should consider. Bureaus are generally extremely inflexible here as anything under 98% of timely payments will qualify as poor.

Strategies to Improve Credit Standing

GuaranteedCreditGroup advises buyers to improve their credit standing by utilizing some important strategies that rely on the aforementioned standards. For instance, anyone who can avoid spending over 30% of the limit for their credit line should do so. Additionally, making timely payments would be the preferred course of action.

Increased Lines of Credit – Common Misconception

One of the most common misconceptions surrounding lines of credit is the fact that people think an increase in the maximum spending limit is always a positive thing. Although it is good that someone’s maximum spending amount goes up, it does not necessarily translate to a recognition of financial responsibility. In fact, a lot of lenders tend to increase some of the most irresponsible credit holders’ lines. Doing so allows them to charge more interest because those credit holders will start carrying larger amounts of debt.

As long as the buyer makes consistent payments and avoids using too much of their spending limit, there is a good chance that their scores will rise fast.

Tags
Show More

Adrian Rubin

Adrian Rubin is a freelancer, creative arts director for various marketing and advertising companies in the New York area. Adrian Rubin specializes in making memorable campaigns. You can learn more about his services here: AdrianRubin.net
Back to top button
Close
Close