What is a credit line and how does it work?

Many of us have heard the term credit line when we investigate credit cards, departmental credits or any other type of financing. But few really know what the credit line is and how it works.

To help you make better decisions regarding what type of financing is best for you, in this article we will explain everything about credit lines.

To get the best line of credit that suits your measurements, you must compare the different offers on the market considering the interests that will be charged for their use.


Credit Line Definition

Credit Line Definition

The line of credit is the maximum amount that the bank grants you to use it, this portion being actually borrowed on which interest will be charged. That is, it is the credit limit that you have available on your card or bank account.

The line acts as a brake or barrier used by the bank to prevent its users from spending beyond their ability to pay.

The way in which a line of credit is assigned to individuals depends on the loan company you choose. Many determine this amount from the study of your income and credit history.


How does the credit line work?

credit problem

Suppose they give you a card with a credit line of 5,000 pesos. It is delivered to you by the store to make purchases. The first thing you buy is a 2 thousand pesos cell phone with your card. Although you have a maximum amount of 5 thousand pesos, now only 3 thousand pesos will be available. Why?

Easy, because spending 2 thousand pesos from your credit line will only subtract 3 thousand from the 5 thousand that they originally gave you. That is, you have to subtract what you spent to the original amount of the credit line in order to know how much you have available.

On the 2 thousand pesos that they lent you, the bank will charge you interest and commissions that are normally a percentage of the amount borrowed. Therefore, the interest you will pay will depend on how much you have actually borrowed, not on the maximum limit.

If in doubt, periodically check the status of your credit line. There you will see what you have spent and how much you have available.


Advantages and disadvantages of credit lines

Advantages and disadvantages of credit lines

Advantage Disadvantages
It allows people better control preventing them from falling into debts that they cannot pay. Limit your expenses to only a fixed amount of money by reducing the option to purchase higher priced products.
It can be a growth tool that allows you to improve your credit history if used correctly. Each line of credit manages its own interest rates and objections according to its type and size.


Types of credit lines

Types of credit lines

  • Mortgage :
    This line of credit is a type of mortgage loan, designed for the acquisition of real estate. Its extension is greater, its interests are more accessible, and access to them is more limited.
  • Vehicle :
    Its objective is to know if you have the ability to pay to acquire a vehicle. These lines of credit are usually granted by financiers and car dealers.
  • Educational :
    The educational credit line is focused on offering financing for students subject to topics such as a maximum limit or a credit approval.
  • Consumption :
    This is the most common type of line of credit because here the consumer-focused credits like departmental cards or credits come in.
  • Business :
    These lines of credit are focused on SMEs that require financing. They usually require proof of income, backup assets, ability to pay or time in operation and sales, to be granted.

Credit lines for individuals

It groups all those types of credit lines that are aimed at natural persons. This is because an individual does not have the same characteristics as a business society.

Knowing what are the lines of credit for individuals helps us find the right financing, because if we need money to buy a car we will not ask for a business credit, for example.

Lines of credit for companies

Unlike credit lines for individuals, credit lines for companies offer higher amounts, longer terms and more accessible credit rates.

The process of credit lines for companies is different from the traditional ones. You must meet requirements such as having a company already operating with a certain amount of sales, backup assets, tax records, etc.


How to get a line of credit?

credit problem

  • Approach the appropriate institution :
    Depending on the type of credit line you need, it will be the institution you will have to approach.
  • It presents all the requirements :
    Comply with all the documentation and requirements requested by the institution to process your credit line.
  • Use it intelligently :
    Remember that your credit line can open, or close, the doors to more financing. Therefore use it carefully and always pay everything you have spent.

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