What is Personal Line of Credit and How Does it Affect Your Credit

personal line of credit is a great tool that helps you build a good credit scoreAnd choosing the right type of credit builder product that suits you is part of managing your finances.

What Is A Personal Line of Credit?

Personal credit is a revolving credit account alongside credit card and home equity lines of credit (HELOC). Revolving credit allows you to borrow funds and repay them in a definite period. 

Your credit score and income are carefully assessed when you apply for personal credit. These two could heavily affect credit limits and interest fees. 

How Does a Personal Line of Credit Work?

A personal line of credit is a revolving credit, typically unsecured, issued by credit unions, banks, or other credit issuers. Here is some additional information you need to know on how personal credit works. 

  • Needs annual or monthly charges to establish a personal credit.
  • Collateral is not a requirement to qualify since it is an unsecured type of loan.
  • Allows borrowers to draw up money up to their credit limits anytime for a set period.
  • It typically issues credit limits ranging from $1,000 to $100,000.
  • Borrowed funds are accessible through line-of-credit checks or bank transfers.
  • Incurs interest charges once the amount is withdrawn.
  • Interest fees will be regularly based on the unpaid balance.
  • No need to pay the loaned amount at once (lump-sum payment).
  • Surcharges may apply for delayed and returned payments.
  • Applicable for long-term projects, especially for borrowers with irregular income flow.

However, lenders sometimes accept borrowers’ collateral deposits to guarantee more favorable terms, such as lower interest fees. 

Moreover, home equity and business lines of credit are other loan types similar to personal credit. But they have underlying collateral for the former and some certain limited expenses for the latter. 

How To Apply For A Personal Line of Credit?

Bad credit may pose a threat to the approval of personal credit. Your score of 690 or higher and reliable credit history are the primary requirements to get approved for one. 

But first, consider these qualifications before applying:

  • Payment History

    A good credit history that includes updated payments shows that you are a responsible borrower.

  • Credit Score

    Your score indicates your financial status and how likely you are to repay your borrowed money.

  • Financial Condition

    It reflects your income and your ability to pay debts.

After checking the above requirements and you are ready for one, follow these steps:

1. Review Your Credit

You will need a good credit standing when you apply for personal credit. Good credit is usually 690 or higher. 

2. Compare Lenders

It is practical to go around and compare lenders. Consider the interest rates, extra charges, and draw dates proposed by lenders. 

3. Collect Necessary Information

Lenders will surely ask for your employment history, income, and sometimes asset to check whether you are creditworthy or not.

4. Fill Out the Application

Complete the application process and submit it. Remember that the lender will ask you to authorize a hard credit inquiry, which could somehow affect your credit standing. 

Applying for a personal credit with bad credit will only give you higher interest fees and other extra charges. 

How Does A Personal Line of Credit Affect Credit?

Like any other form of credit, personal credit can also affect your credit standing. 

  • Boosts Your Credit Score Through Timely Payments

Since lenders usually submit repayments to credit reporting agencies. Thus, making on-time payments can help establish a good payment record in your credit report. On the other hand, delays in payments can likewise negatively impact your score. 

  • Improves Your Credit Mix

A credit mix takes up to 10% of your credit score. Applying for a new line of credit, such as personal credit, will help you improve your credit mix. Having multiple credit accounts will show the lender your ability to handle several types of credit. 

  • Drops Your Credit Score by Hard Inquiry or Hard Credit Pull

A hard inquiry or credit pull occurs when a lender asks to review your credit file before getting a new line of credit. It is where lenders examine whether you are a risky borrower or not. 

Hard inquiries or hard credit pull will reflect on your report produced by credit reporting agencies and can affect your score by 10 points. 

Reasons A Personal Line of Credit May Create a Negative Impact

Generally, any form of credit, especially irresponsible usage, can negatively impact your score. 

But how can personal credit affect one’s credit?

  • By Hard Inquiry or Hard Credit Pull

Like any other credit type, lenders typically run a hard inquiry to any interested borrowers to check their creditworthiness. Through this, your score is decreased by up to 10 points. 

Personal credit can be a tool for debt consolidation and paying off debts, but it could also negatively harm your credit. 

This debt cycle can lead to bad credit, especially if the interest rate burden is so high that you start missing payments. 

What Is The Right Kind Of Credit?

Choosing the correct type of credit dramatically depends on your need. 

  • Small Purchases

A credit card might work better if you make easy purchases such as groceries, household items, gasoline, apparel, online shopping, and professional fee services. You can earn rewards and even save more money if you pay your monthly dues.

  • Big Purchases

Suppose you have big projects like home renovation, medical bills, weddings, debt consolidation, etc. Then a personal credit might be suitable for you. 

Whatever you choose, keep in mind to review your potential lender first. Study its proposed terms and agreements before you sign up and apply for one. 

Final Thoughts

In conclusion, a personal line of credit is helpful if you are trying to finance a high expense, pay medical bills or even consolidate debt. But just like any other type of credit, it will affect your credit standing depending on how you use it. 


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