A line of credit can serve as a convenient and efficient way to quickly get cash in hand for business or individual expenses. Because you only pay interest on the money you actually take out—as opposed to a full loan amount, for which interest accrues on day one—a line of credit is a lot more flexible and potentially easier on the wallet than a traditional loan. For example, if you are approved for a $20,000 line of credit, you won’t pay a penny in interest until—or unless—you withdraw some of that cash. The interest only applies to the amount that is actually withdrawn.
The interest rates on a line of credit are also significantly lower than on a credit card. But like a conventional credit card, the funds from a line of credit are easily accessible anytime you need them. In some ways, a line of credit is the best of both worlds, offering the security of an approved loan amount with the as-needed flexibility of a credit card. A line of credit is particularly beneficial when a borrower doesn’t know how much of an approved loan they will really need. Once any of those borrowed funds are paid back, the “revolving” credit line is reset and available again.
Borrowers need to be careful, however. Your credit rating can be affected by how often you withdraw from a line of credit, which can be reduced or closed anytime at the lender’s discretion. Interest will be lower if the credit is secured by a business or personal collateral.
Increasing a line of credit may be necessary at some point, and doing so responsibly can pay off in more ways than one. For one thing, it is typically better to have more credit than you need, as that will lower what is called your credit utilization. There are three major approaches to increasing a line of credit.
Request an increase
This isn’t necessarily as simple as it sounds. Keep in mind that asking for an increase could hurt your credit. The lender may take a harder look at your borrowing habits and CIBIL score when you ask for an increase. Too many of these “hard inquiries” by financial institutions could affect your ability to borrow in the future. But if you have been consistently on time with payments for at least six months, it may be worth the risk if the money is needed and prospects for business are good. A small-business owner also needs to be conscious of his or her personal credit score, as it may have a bearing on the decisions of the financial institution. But don’t wait until you have maximized your credit to take action. That may work against you when your credit behavior is scrutinized.
Wait for an increase
Read your contract. You might qualify for an automatic increase without even having to ask for it. If you have paid your minimum or full balance on time for six months in a row, some financial institutions will raise your line of credit automatically. This is often a best-case scenario because automatic increases have no impact on your credit score. When you are offered an increase, it is generally a good idea to accept it. You don’t necessarily need to use the additional credit, but just having it will drop your credit-utilization ratio.
Apply for a new account
A new line of credit, or even a new credit card account, maybe another option to increase your overall credit power without having to rely on the decisions of just one financial institution. The downside is you wouldn’t be extending the length of your credit history on the initial line of credit.
Whatever approach is taken, it is important to be careful. It is a mistake to apply for a credit increase too often in a short period of time. What’s more, if you have missed payments, increasing your credit limit isn’t likely to solve your problem and may reduce your chances of being approved. The good news is that good credit behavior is eventually going to improve your credit score, even if it takes a temporary dip due to requesting a credit increase.
The most important thing, overall, is to always maintain healthy financial habits—to get the most out of your line of credit now and to ensure a high credit rating in the long term.
