How Does a Personal Line of Credit Affect Your Credit?

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Nearly everyone needs a spot of cash now and then. Today, you have a wide range of options for accessing credit: credit cards; personal loans; buy now, pay later arrangements; home equity lines—to say nothing of willing friends and family.

One of your options is a personal line of credit. If you've heard about personal lines of credit but never actually had one, you're not alone. Personal lines of credit are less common today than they were a decade or two ago, but they're still an option that's potentially worth pursuing. Read on to learn more about them, if they're right for you and how they'll affect your credit.

What Is a Personal Line of Credit?

A personal line of credit is similar to a credit card account. A bank or other financial institution extends a line of credit with the invitation to access this money up to a certain amount whenever you need it. Any money you use becomes revolving debt that you pay back over time just like you would with a credit card, with minimum payments and no early repayment penalty. Limits depend on a variety of factors, including your credit score. Typical lines range from $1,000 to $25,000 or more.

Interest rates on personal lines of credit are generally lower than they would be on a credit card, currently starting around 10% with good credit. Lines of credit may have limited terms, typically three to five years. When the term ends, you can continue paying your outstanding balance until it's paid off, but you no can no longer use the account to draw additional money. Secured lines of credit that use certificates of deposit or investment accounts as collateral may offer higher limits, depending on the size of the account. Some lines of credit come with annual fees.

A long time ago, when credit card payments pretty much always involved using an actual card, a personal line of credit was a handy way to pay bills or cover expenses that did not accept a card for payment. You might have used it to cover overdrafts on your checking account, for example, or medical bills. Now that you can pay for almost anything with a credit card, the benefit of a personal line of credit may be more psychological than functional: It's a way of borrowing a set amount of money at a decent interest rate and paying it back as a separate debt over time.

How Does a Personal Line of Credit Affect Your Credit?

Credit reporting agencies typically track personal lines of credit as revolving credit, like a credit card account. Since a credit line is treated as revolving debt, both your maximum credit line limit and your balance affect your credit utilization. Your payment history is also reflected on your credit report, which could help or hurt your score depending on how you manage the account. Here's more detail on how a personal line of credit affects your credit:

  • Available credit on your personal line of credit can improve credit utilization, which accounts for 30% of your FICO® Score . To calculate your credit utilization ratio, divide your total credit limits by your total debt on credit cards and personal lines of credit. Quick example: If the credit limits on your credit cards and personal line of credit add up to $40,000, and you have $4,000 in combined debt, your credit utilization is 10%.
  • Debt on your personal line of credit adds to your revolving debt, along with your credit card balances. Revolving debt raises your credit utilization. When credit utilization approaches and climbs above 30%, it has a greater potential to harm your credit; those with the highest credit scores tend to keep it under 10%.
  • On-time payments on your line of credit help your credit score. Payment history is the most heavily weighted factor in calculating your credit score, accounting for 35% of your FICO® Score. On the other hand, payments that are 30 days or more late can stay on your credit report and affect your score for up to seven years.
  • A long-standing personal line of credit adds to your length of credit history. However, a new line shortens your overall history of accounts as will closing a personal line of credit. A shorter credit history may lower your credit score.

What if your bank closes your personal line of credit before your term is up? As these accounts become less common, some banks may stop offering them or even close accounts. If this happens, your available credit would shrink and your length of credit history could drop. A reduced credit limit could affect your overall credit utilization ratio. If this happens to you, contact your bank to find out what arrangements they might be able to make to help minimize the impact to your credit.

5 Reasons a Personal Line of Credit May Not Be a Good Fit

As personal lines of credit become less popular with financial institutions, new types of credit are replacing them. Here are a few reasons you might not want to choose a personal line of credit—and what you might choose instead.

  1. You can't find a personal line of credit. Not every bank offers personal lines of credit. As with any type of credit, you'll have to shop for good terms.
  2. Your credit card offers a pay-in-installments feature. Some credit cards now allow cardholders to separate out large purchases and pay them off in regular installments over time.
  3. A personal loan works just as well. If you want to borrow a set amount of money at a favorable interest rate, a personal loan might work for you. Bonus: Personal loans count as installment loans, not revolving debt, so your credit utilization won't be affected.
  4. You can buy now, pay later, often without interest, using a company like Klarna or Afterpay. No interest beats low interest any day.
  5. A home equity line of credit (HELOC) is a better fit. Although some personal lines of credit offer six-figure limits, a HELOC may be more appropriate if you're hoping to take on a major home repair or renovation. A HELOC may offer a lower APR and a larger credit line. The downside: Your home is collateral, and can be at risk of repossession if you default on your loan.

A personal line of credit—or any of the choices listed above—is a better option than a payday loan or title loan, either of which can trap you into a cycle of debt with ultra-high interest rates, and ballooning payments.

The Right Kind of Credit for Your Situation

If you're concerned about how a personal line of credit might affect your credit, this is an excellent opportunity to get up to speed on your credit file. Check your credit score and report for free with Experian anytime to get a clear, personalized picture of how you're managing your credit—and what you can do to improve.

In the meantime, a personal line of credit can be a useful tool for managing and diversifying your overall credit portfolio. With so many options available in the market for credit, you have an excellent chance of finding a solution that fits your situation and needs.