Consumer Credit: What Is A Credit Line?

If you are still learning your way around the world of finances, you may want to learn about a credit line.

As young people grow up and enter the world of jobs, income, and spending, they can get involved in establishing a credit history and building a financial reputation. Monitored by the three credit report agencies in the United States, your credit history will follow you the rest of your days and serve as an indicator of your financial risk status. So it is wise to learn something about the financial world so that you can make good use of your income and credit opportunities.

One concept that some account applicants or account holders are unfamiliar with is a credit line. What is it? How does it work? What should one strive for in terms of an upper limit?

A credit line is the amount of credit advanced by a credit agency or credit card company, such as a bank or lending institution. For example, if you apply for a credit card through your bank, you may be approved and offered a $5,000 credit line. This means you are permitted to borrow up to $5,000 on this account.

If you borrow more, you may be penalized in terms of over the limit fees and the request to immediately pay the amount charged over $5,000. So if you charged $5,250 you may have to repay the $250 plus an over limit fee and your usual payment, all totaling hundreds of dollars.

You need not borrow the entire $5,000. In fact, you need not use your credit line at all. Sometimes it helps being approved for credit and having a credit line available for emergency expenses if needed. Plus your credit report will show that account's approval with your credit line, reflecting your positive financial status.

But if you apply for and are approved to open several credit accounts, you could run into trouble. Assuming that each account has a credit line of several thousand dollars, you potentially could buy things to use all the available credit on each account and end up owing thousands of dollars that you cannot afford to repay. When this happens, some people declare bankruptcy and their good name suffers for several years at least.

If you apply for a credit card, you may be given a rather low credit line at first. It may be $2,000 or $8,000 but not typically the $50,000 to $100,000 that some cards advertise. That level of credit comes only after several years of proving yourself a responsible customer by charging within your credit limit and making prompt payments each month.

A credit line is based on several criteria that are evaluated at the time of application. One is your annual income and the nature of your employment. If you are self-employed or have a seasonal job, you may be assessed as a credit risk. Another indicator is how long you have held your present job position. Additional credit lines and other household income may be considered as well.

In general, it is a good idea to start with a low credit line. If you can use that responsibly and make timely payments without jeopardizing your household budget for other expenses, you may be a good candidate for requesting a higher credit line. Typically, many credit institutions will not consider raising your credit line until you have managed the account in good fashion for six months to a year.

A credit line is an exciting acquisition in the world of finance. You may feel like a millionaire, but don't start living like one unless you can afford to repay your credit purchases!

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