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Consumer Credit: What Is A Credit Line?

The most popular and often first line of credit most individuals experience is that of a credit card. Another type of popular credit is called a home equity line of credit, or HELOC, which applies specifically to homeowners but is similar in concept to credit cards. In its simplest terms a credit line is defined as the amount of money you're permitted to borrow from a financial institution under certain terms for repayment.

Any adult graduating high school or entering college will normally be offered their first credit card which is the most common form of credit line extended today. When the contract is signed, individuals agree to certain terms such as the interest rate paid on the loan, when payments will be paid and for what amount. A credit limit will also be applied to the credit line to prevent credit card holders from borrowing more than what is approved by the lender.

An example would be John Doe has just entered college and has received a credit card offer from a national bank which has a 0% interest rate for six months and a credit limit of $1,000. This means that the bank is offering a credit line to John for which he can use to make purchases and then pay back under terms as specified in the contract. Why is having a credit line important? What are some of the pitfalls in troubles that can result? What is the best way to manage credit lines?

Receiving that first credit card is often characterized by financial experts as establishing credit. What this means is that some organization has entered in a financial arrangement with you on mutually beneficial terms. If those terms are upheld, meaning payments are made on time and for the correct amount for an extended period of years then other financial organizations view this positively and will also want to offer credit lines to you.

Getting that first credit line via a credit card and being a responsible credit card holder for a number of years positively affects your credit rating. This can lead to lower interest rates on future lines of credit and also to automobile and home loans. Needless to say getting a credit line early in life and properly managing it is very important.

Unfortunately, a fairly large number of young people with their first credit line tend to manage their money incorrectly and run up credit card balances without the ability to pay. This could have dire consequences on future financial health and can negatively impact future employment. All credit transactions appear on personal credit reports. Using a credit card and repaying the loan is tracked by three credit reporting agencies.

If John Doe, who has a $1,000 credit line with his bank, immediately goes out and purchase is a $1,300 TV he has just made multiple mistakes in managing his credit line. Not only is he over his credit limit by $300 which must be paid by the next due date but he will also probably incur an over the credit limit fee and could possibly void the 0% interest rate and be penalized with a higher interest rate as high as 29%. So because he didn't properly manage his credit line three bad things just happened.

Building good credit is a lifelong pursuit where individuals start small and overtime prove they are reliable financial risks who pay on time and stay within the contract terms. This leads to more lines of credit with lower interest rates and better terms if managed correctly. While it's tempting to go crazy and max out a credit card that short term gain can lead to significant long-term hardship and is obviously discouraged.

When companies extend a credit line to individuals they do it to make money on the interest of the loan. They don't particularly care if you go over the credit limit or pay late and incur penalties and fees. Only you can make credit work for you in the future by being responsible and cautious by using credit lines appropriately. Being bad might be fun but being good pays more in financial terms in the long run.