Learn About Lines of Credit – How They Work and How They Affect Your Credit Scores
If you fail to make payments, the bank may seize the asset (such as your home or savings) to recoup its losses. Unsecured lines of credit, on the other hand, are not attached to any asset.
However, because the financial institution is taking on additional risk, there’s a good chance your interest rate will be higher.
Home equity line of credit
A HELOC, or home equity line of credit, is a popular revolving account secured by the equity in your home. It’s commonly referred to as a second mortgage. When you apply for financing, a lender will analyze your creditworthiness and debt-to-income ratio. You may be able to qualify for a cheaper interest rate and better conditions because a HELOC is secured by your home equity.
Regardless of the advantages, keep in mind that the risk associated with a HELOC is substantial. You risk losing your home if you stay caught up on your payments.
Business line of credit
When you need to borrow money for your own firm, a business line of credit is usually a better option than personal finance. A business line of credit can be used to purchase merchandise, increase cash flow, and meet other business-related needs.
If you maintain the account properly, it may also aid in developing business credit. Depending on the lender, your business and personal credit may be reviewed as part of your funding application.
Secured business lines of credit, which are prevalent, may require you to pledge assets your company owns. On the plus side, many lenders do not disclose corporate credit lines to personal credit bureaus. This is fantastic news if you want to keep your personal and business credit separate (as every small business owner should do).
How Do Lines of Credit Affect Your Credit Scores?
Payment history
When determining your credit scores, credit scoring models such as FICO and VantageScore consider various factors. Of course, your payment history is an essential factor.
(Make sure you make your minimum payments on schedule!) If you acquire a line of credit and make on-time payments, the account may help you boost your credit score. However, if you make late payments regularly, that same line of credit may harm your credit.
