Learn About Lines of Credit – How They Work and How They Affect Your Credit Scores

Credit utilization

The way you manage your revolving accounts can also have a significant impact on your credit scores. Credit utilization accounts for about one-third of your FICO Score. Even if you make on-time payments, a high credit card amount might affect your credit score if it raises your credit use ratio.

Because credit lines are similar to credit cards, many individuals fear that a high balance-to-limit ratio on these accounts may also harm credit ratings. But that is not the case. When calculating your revolving utilization percentage, scoring algorithms do not consider lines of credit.

Length of credit history

When you first obtain a new line of credit, the average age of accounts on your credit reports may decrease. Because credit scoring algorithms analyze your average age of credit, opening a new credit account may lower your credit ratings – at least temporarily.

However, when the credit line matures, it can assist you here. Remember that the length of your credit history only accounts for 15% of your FICO Score.

While the average age of your accounts is essential, a line of credit may still enhance your overall scores if you pay on time or use it to lower your utilization ratio by paying off credit cards.

Credit Inquiries

A line of credit might affect your credit when you apply for the account. When you apply for loans, the lender reviews typically your credit reports. This access to your credit report is known as an inquiry, and it may harm your credit ratings.

Hard credit inquiries (such as those made while applying for finance) can potentially harm your credit score. They can remain on your credit reports for up to 24 months and may impact your credit scores for up to 12 months.

In general, a few credit queries will only do a little harm. Credit inquiries affect only 10% of your FICO Score. As long as you don’t apply for new credit frequently, applying for a line of credit is unlikely to have a significant impact on your credit scores.