How a Line of Credit Affects Your Credit Score
Your credit score determines the interest rate you'll pay on an extension of credit. It can also prevent you from qualifying at all. A FICO score runs from 300 to 850 and if you're considering obtaining a line of credit, it's prudent to understand how that will affect your credit score.
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Identification
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A line of credit is an unsecured revolving credit line from a bank or financial institution. You can access the credit line on an as-needed basis and once you pay it off, you can use that credit again. This prevents you from having to take out multiple loans. The interest rate on a line of credit varies, but according to Bankrate, the rate on a line of credit is often lower than that of a cash advance from a credit card or a payday loan.
Effects
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When you apply for a line of credit, the bank runs a credit check to see if you meet its credit standards. This will place an inquiry on your credit and it may drop your credit score by a small amount, according to MyFico. If you fail to repay the line of credit, however, the bank will report that late payment history to the credit bureau. A single 30-day-late payment can drop your FICO score by as many as 110 points, according to Bankrate.
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Considerations
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You can also obtain a line of credit through your home, which is called a Home Equity Line of Credit. Unlike a personal line of credit that is unsecured, a HELOC uses your home as collateral. Homeowners often use HELOCs for improvements to their homes and emergency repairs. To determine if you qualify for a HELOC, the lender will view your credit score. HELOCs are generally offered only to homeowners who have higher credit scores, although lending standards vary from bank to bank.
Warning
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Although having access to a line of credit can offer financial convenience, it can be risky. If you default on a personal line of credit, the lender can sue you to obtain a judgment. If you default on a HELOC, the lender can recover the money either by foreclosure or by suing you in court for a judgment since a HELOC is considered a recourse loan, or a loan that you are personally responsible for regardless of the value of the home. If a judgment is obtained in court, not only can the lender garnish your wages or seize funds in your bank accounts, it can also place a lien on current and future property that you may own. Plus, the judgment will appear on your credit report and lower your FICO credit score.
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