How Does Having a Personal ‘Line of Credit’ Affect My Credit Score?

When you open a new account with a bank or financial institution, they will often ask if you’re interested in opening a “line of credit.” This is meant to be a form of overdraft protection – essentially a buffer in case of a financial emergency. Basically, if you were to use your debit card for a purchase exceeding your available funds, the balance would be transferred to your line of credit attached to your account, and you would be subject to the interest rates and payment schedule to which you agreed when you signed up.

While this resource can be a great asset for some, it can easily be misused and end up dinging your credit score. Here are some things to keep in mind if you opt for opening a personal line of credit:

Credit utilization rate

An important component of your credit score is your “credit utilization rate.” This refers to the amount of credit you use compared to the amount of credit available to you. If you always have a high balance on your line of credit, this reflects poorly on your credit and can lower your score.

The best line of credit scenario

If you’re expecting a payment but needing to pay a bill, a line of credit would be a good option because the balance would be paid down. Use your line of credit only for purchases you can afford. Those whose income is commission-based, for example, may have a stable and significant annual income but that is variable month-to-month. Those individuals would benefit greatly from a line of credit.

Activity matters

If you maintain a zero balance on your line of credit, your institution may stop reporting it and then it wouldn’t benefit your credit score at all. Keep it active, responsibly of course, so that your credit utilization rate remains low. Here are some tips for creating and maintaining healthy credit habits.

Be punctual

As with credit cards or any kind of line of credit, you must make your scheduled payments on time. Missing a payment or paying late can lower your credit score by 60 to even 100 points. Set a reminder on your phone to make your payment or write it into your calendar so you don’t forget.

Using a personal line of credit for a buffer and for things you can afford is a great way to boost your credit score. Keep your credit utilization rate low by maintaining a low balance and make your payments on time, and your line of credit will be an asset to your credit score and not a detriment.

 

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