A New Line Of Credit Can Improve Your Existing Credit When Handled Responsibly:
In our Quickest Way To Raise Credit series, I’ll show you why opening a new line of credit can actually help get you back on track. I know, it sounds risky, crazy, and counter intuitive, but getting a fresh start to show off your financial responsibility can go a long way to raise your credit score.
Credit problems suck. If your problems are too much for your to tackle on your own, here are some excellent resources to help launch your financial reputation:
- www.CreditSesame.com – This is a free montly service. Credit Sesame helps monitor all of your spending, loans, and even helps protect your identity from fraud. Credit Sesame has the most hands on tools to offer someone who’s looking to improve their credit.
- www.CreditRepair.com – This is a paid monthly service. Sign up for a Credit Repair’s monthly membership so that you can earn 40 points on your credit.
When it comes to repairing credit, it may be counterintuitive to consider opening a new credit account, especially if overspending and missed payments got you into hot water in the past. However, establishing a new credit account – specifically, a line of credit from a financial institution – can help boost your credit profile over time. Here’s how it works.
What is a Line of Credit?
Similar to other credit accounts, a line of credit is a way to borrow money in advance and repay the balance over time. Typically issued by a bank or credit union, a line of credit can be tied to an asset, like a home or business, or it can be offered as a stand-alone borrowing tool without something backing it up. A line of credit allows you to borrow up to a set limit, similar to a credit card, and as long as the credit limit is not reached (and payments are made consistently on time), you can continue borrowing as much or as little as you need. When you draw against the line of credit, a payment is due either in full or in part; if you don’t use the credit line, you owe nothing.
Benefits to a Line of Credit
Most line of credit issuers provide accounts with much higher spending limits than credit cards, all while charging a much lower interest rate. Lines of credit come with no rewards or cash-back but do offer peace of mind when cash flow is tight. In most cases, a line of credit can be a smart money management tool for those battling with poor credit as they are reported to the three major credit bureaus as available credit. Similarly, credit line usage and payment history are reported every month. As long as you stay within the credit limit and maintain on-time payments, a new credit line can boost your overall credit history and score.
Do I Qualify?
Most accounts tied to credit require a strong history of repayment, no recent bankruptcies or court judgments, and stable income in relation to outstanding debts. However, a line of credit may not require as stringent qualifications as a credit card or personal loan. If you have poor credit and are trying to work your way out of the proverbial ditch, applying for a line of credit linked to your checking account may be a great first step. Banks and credit unions offer lines of credit that act as overdraft protection – this helps build you credit profile while also safeguarding you from excessive overdraft fees should your account run low.
In addition to overdraft lines of credit, some financial institutions offer secured credit lines. A secured line of credit is one that is backed by another account, like a certificate of deposit, money market or savings account. The bank will set your credit limit as the same amount that is held within the pledged account, knowing that if you default on repayment, their potential for financial loss is fully covered. Because of this safety net, secured lines of credit do not require a review of your credit history in most cases.
Utilizing a line of credit to help build your credit back to where it should be is a viable option for most spenders. Start with your current bank or credit union to see if an overdraft line of credit is available; if not, seek out some alternatives with a secured line of credit. As long as you are responsible for your spending and your repayment, a line of credit is a simple way to boost your financial reputation.