What you should know

• There are five significant factors that determine your credit score.
• Your payment history is the most important credit score factor.
• Paying on time and maintaining low balances boosts your credit profile.

We all occasionally need a little extra cash. Luckily, there are plenty of convenient options to choose from nowadays, whether it's using credit cards, taking out personal loans, or buy now pay later plans. Plus, there’s always the possibility of turning to generous friends and family for a helping hand.

Ever thought about a personal line of credit? If you've heard about them but never actually had one, you're not alone. While they might be a bit rarer than in the past, they're still a solid option to consider. Let’s dive in to discover more about lines of credit and understand how they may impact your credit score.

What Is a Personal Line of Credit?

A personal line of credit allows you to borrow money as needed, up to a set limit. Unlike a traditional loan, you only pay interest on the amount you actually use, not the full approved limit. It works similarly to a credit card. This type of credit is ideal for handling unexpected expenses, managing cash flow, or funding ongoing projects—all without the hassle of reapplying every time you need access to funds.

For example, if you've got a $10,000 line of credit and you use $1,500 of it, you'll only need to make payments on that $1,500 amount. The best part? You can dip into your line of credit again and again, as long as you stay within your limit.

What Is a Credit Score?

Think of your credit score as a quick snapshot of your financial reputation, packed into a handy three-digit number. If your score is on the lower side, lenders might see you as a bit of a gamble, whereas a higher score paints you as a reliable borrower. While there are several kinds of credit scoring models out there, the big players—FICO and VantageScore—both use a scale from 300 to 850. Where you land on that scale gives lenders a peek into your past and future credit habits.

How a Line of Credit Affects Your FICO Credit Score

A line of credit can have both positive and negative effects on your credit score, depending on how you manage it. The FICO credit scoring model evaluates five key factors: payment history, credit utilization, length of credit history, credit mix, and new credit inquiries. Here’s a breakdown of how a line of credit could impact each one:

1. Payment History (35% of Your Score)

Your payment history is the most important credit score factor. When you have a line of credit, it shows how you handle payments over time. Paying on time is an excellent way to boost your credit report and gain trust with lenders, which can give your score a nice lift. But watch out, one late or missed payment can be a setback and might stick around on your credit report for a while.

Tip: Set up autopay to avoid missing payments.

2. Credit Utilization (30% of Your Score)

Credit utilization is all about how much of your available credit you're actually using. Having a line of credit can boost your total available credit and help lower your utilization rate, especially if you keep those balances low or at zero.

For a healthy credit score, it’s generally advised to keep your credit utilization below 30% of your available limits. But if you really want your credit score to shine, aim for even less. Staying below 10% is considered excellent and will give your score a real boost. Many credit models prefer when you’re in the 1-9% range because it shows you're using your credit smartly. Interestingly, having 0% utilization isn't always ideal, as it might imply that you're not using credit at all.

Example: If your line of credit is $10,000 and you’ve used $2,000, your utilization is 20%, which is considered healthy.

3. Length of Credit History (15% of Your Score)

The age of your credit accounts plays a role in shaping your score. It considers the age of your oldest account, your newest one, and the average age of all your accounts. Opening a new line of credit can lower this average a bit, giving your score a small dip at first. But, as time goes on, keeping that line of credit open and in good standing will help boost your account age and improve your score. The longer you manage your credit accounts well, the better they look on your credit history and overall score.

Tip: Keep older accounts open, even if you don’t use them often.

4. Credit Mix (10% of Your Score)

Your credit mix is all about the different types of credit you handle, like credit cards, mortgages, auto loans, and lines of credit. Adding a line of credit can spice up your credit profile, especially if most of your existing accounts are tied to installment payments. Lenders love seeing a diverse credit mix because it suggests you can juggle different types of credit like a pro. Although this factor isn’t as crucial as payment history or utilization, having a well-rounded mix can still give your score a nice little boost.

Tip: According to Experian, one of the major credit bureaus, an "ideal credit mix includes a blend of revolving and installment credit."

5. New Credit Inquiries (10% of Your Score)

When you apply for a line of credit, you might experience what's called a "hard pull," which can influence about 10% of your credit score. Each inquiry typically knocks your score down just a few points. The good news? Any negative effect is short-lived and usually vanishes within a year. Once you’re approved and manage your line of credit well, you’ll likely see your score climb.

Learn More: Line of Credit vs. Credit Card: Difference, Pros and Cons & More

Positive Impacts of a Line of Credit

Consistent On-Time Payments

Regular, on-time payments on your line of credit may boost your credit score by strengthening your payment history, which shows lenders you’re reliable and capable of managing credit responsibly.

Tip: If you prefer handling payments yourself, try using calendar alerts or bill payment apps to remind you when due dates are coming up.

Maintaining Low Credit Utilization

Keeping your credit utilization low is key because it positively impacts your credit score. When you use less than 30% of your available credit—and even better, keep it under 10%—it shows lenders you're on top of your credit game. This responsible management means you’re not overly dependent on borrowing, which often leads to snagging better loan deals and interest rates.

Adds to Your Credit Mix

Adding a line of credit to your financial profile adds variety to your types of credit, showing lenders you can manage different forms of debt responsibly.

Negative Impacts of a Line of Credit

Missed or Late Payments

When you pay late, lenders report it to the credit bureaus, and it stays on your credit report for up to seven years. Even one missed payment can cause a noticeable drop in your score, especially if your credit history is otherwise clean.

Exceeding Your Credit Limit

When you go over your limit, it signals to lenders that you may be overextended or struggling to manage your debt. This can cause your credit score to drop. Additionally, maxing out or going over your limit may lead to fees, higher interest rates, or declined transactions—further hurting your financial standing.

Having High Credit Utilization

Using a significant amount of your available credit or maxing out your line of credit can negatively affect your score.

Top Strategies to Boost Your Credit Score with Lines of Credit

When using a line of credit wisely, it can be a great way to improve your credit score. Below are the most useful methods to take advantage of your line of credit.

Make Payments on Time

Always pay your line of credit bill on time or even pay earlier before the due date. Payment history is the largest part of your score, on-time payments show lenders you’re a reliable borrower.

Keep Credit Utilization Low

Avoid utilization rates that exceed your total borrowing capacity. Ideally, your utilization rates should stay below 10% of your total available credit. This shows lenders you know how to manage credit responsibly to keep your credit in shape.

Build A Mix of Credit

Building a mix of credit means having different types of credit accounts, such as credit cards, auto loans, mortgages, or lines of credit. Lenders like to see that you can manage various forms of debt responsibly, making you a more attractive borrower in the eyes of lenders.

Monitor Your Credit Regularly

By checking your credit reports and scores often, you can spot errors, track your progress, and catch signs of identity theft early. You’re entitled to a free credit report every year from each of the three major credit bureaus—Equifax, Experian, and TransUnion—at AnnualCreditReport.com. Many banks and credit card companies also offer free credit score tracking tools that make it easy to stay informed.

Use a Line of Credit as an Emergency Fund

A line of credit could be beneficial for legitimate emergencies if you pay it off in a timely manner. If you control how you need to utilize credit, even in a case of urgency, you could manage the amount that you borrow from the credit line successfully which will build your credit.

Learn More: 7 Tips on How To Use Your Line of Credit Wisely

The Final Word

Use a line of credit wisely to help grow and preserve your credit score. By positively influencing all five major credit score factors, it can be a great tool. Just remember to make timely payments and keep your balances low to enhance your credit profile. On the flip side, be careful—not making payments or using too much credit can set you back.