Does a Line of Credit Affect Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, a three-digit number. Lenders use this score to assess repayment likelihood, influencing loan approvals, interest rates, and credit limits. A line of credit (LOC) offers a flexible borrowing option, providing access to a set amount of funds that can be drawn, repaid, and re-borrowed as needed, similar to a credit card but often without a physical card for purchases. Interest is typically charged only on the amount actively borrowed.

How a Line of Credit is Reported to Credit Bureaus

Information about a line of credit becomes part of an individual’s credit report through credit bureaus: Experian, Equifax, and TransUnion. These national agencies collect financial data from lenders to compile comprehensive credit profiles for consumers. Lenders regularly furnish these bureaus with updates on accounts, including lines of credit.

Specific data points reported form the basis for credit score calculations. This includes the date the account was opened, providing a timestamp for the credit history. The maximum credit limit extended for the line of credit is also reported, which is a crucial element in assessing credit utilization.

The current balance owed on the line of credit is consistently updated, reflecting the amount of funds actively used. Payment history is reported, noting whether payments are made on time, late, or missed entirely. The overall account status, such as whether it is open, closed, or in default, also contributes to the reported data. This information is used by credit scoring models.

Impact of Opening a Line of Credit

Opening a new line of credit can have several immediate and short-term effects on a credit score. One initial impact stems from the “hard inquiry” that occurs when a lender reviews a credit report during the application process. This inquiry can cause a small and usually temporary dip in the credit score. Hard inquiries remain on a credit report for up to two years, though their impact on the score generally diminishes after about 12 months.

Adding a new account can also influence the average age of accounts within a credit file. Since credit scoring models consider the length of credit history, a new account, being young, can slightly reduce the overall average age of all credit accounts. This might result in a minor, temporary reduction in the credit score. As the new line of credit ages, its contribution to the average age of accounts will become more favorable over time.

A line of credit, as a type of revolving credit, can also affect the “credit mix” component of a credit score. Credit scoring models favor a diverse portfolio of credit, which includes both revolving accounts and installment loans. Introducing a line of credit can positively diversify the credit mix, potentially offering a small positive impact on the score. The initial availability of new credit can also immediately lower the overall credit utilization ratio if no balance is carried, which can provide a modest initial boost.

Impact of Using and Managing a Line of Credit

The ongoing use and management of a line of credit influence an individual’s credit score, with credit utilization and payment history being impactful factors. Credit utilization refers to the amount of credit currently being used compared to the total available credit. Keeping this ratio low, typically below 30% of the available credit limit, helps maintain a healthy score, as higher utilization can lower it. For instance, if an individual has a $10,000 line of credit and uses $5,000, their utilization is 50%, which is generally considered high and can negatively affect the score.

Payment history is a paramount factor, often carrying the most weight in credit scoring models. Consistently making on-time payments demonstrates responsible credit management and builds a positive history over time. Conversely, late or missed payments have a negative impact on a credit score and can remain on the credit report for up to seven years. Even a single payment that is 30 days past due can harm a score, though the negative impact lessens as the derogatory mark ages.

The length of credit history also plays a role, as older accounts generally contribute more positively to a credit score. As a line of credit account ages, it lengthens the average age of all credit accounts, which can improve the score over time. The overall amount of debt carried on the line of credit contributes to the “amounts owed” category in credit scoring models. A large outstanding balance across all credit accounts, including a line of credit, can indicate higher risk to lenders and may negatively affect the score.

Impact of Closing a Line of Credit

Closing a line of credit can have a notable impact on a credit score, primarily by affecting credit utilization and the average age of accounts. When a line of credit is closed, the associated credit limit is removed from the total available credit across all accounts. If other credit accounts carry balances, this reduction in overall available credit can immediately increase the credit utilization ratio, potentially leading to a decrease in the credit score. For example, if an individual has $5,000 in debt and $20,000 in total available credit (25% utilization), closing a $5,000 line of credit would reduce available credit to $15,000, increasing utilization to 33% and potentially lowering the score.

Even after closure, a line of credit account typically remains on the credit report for a significant period. Positive accounts, those with a history of on-time payments, can stay on the report for up to 10 years. Accounts with negative information, such as late payments, generally remain for seven years. During this time, the account continues to contribute to the individual’s credit history.

The average age of accounts, a factor in credit scoring, can also be affected when a closed account eventually falls off the credit report. If the closed line of credit was an older account, its eventual removal can reduce the overall average age of the remaining active and reported accounts. This reduction in average age could negatively impact the credit score. Individuals should consider the potential impacts on their credit utilization and credit history length before closing a line of credit, especially one with a long history of responsible use.