Americans have an average credit card limit of around $30,000, according to Experian. However, this statistic does not account for lines of credit. Though similar, lines of credit are technically different from credit cards.
We’re covering everything you need to know about credit lines. We’ll discuss what credit lines are and the average credit line limit. We also cover why credit limits are beneficial, what factors go into determining them and what you can do to secure a higher credit limit. By the end of this article, you should have a much better understanding of how credit lines can factor into your personal finances.
A line of credit is a lending tool. Financial institutions, like banks or credit unions, extend a line of credit, which you can then borrow against. There are preset borrowing limits, meaning that you can’t borrow more than a certain amount without first paying a portion of the balance.
For instance, let’s say that you have a line of credit with a $5,000 limit. You can borrow up to $5,000 without having to make a repayment. If you pay off a portion, you are eligible to borrow that money again. In this scenario, if you pay down $1,000, your balance would be $4,000. You could then borrow up to $1,000 again.
Three of the most common types of lines of credit are:
- Home equity
You often have flexibility in how you choose to use your line of credit. You can use the funds to pay off credit card debt, open a new business or renovate your home — whatever you choose.
A line of credit is very similar to a credit card. Both are revolving, meaning that as you pay off your balance, your available credit increases. The primary difference between credit cards and lines of credit is the draw period.
Your credit card issuer allows you to borrow money on your card as you please, as long as your account is in good standing. The best credit card companies offer reward programs to incentivize cardholders, like cash back or travel points.
Credit cards often have interest rates higher than lines of credit, though if you pay your balance in full every statement, you won’t have to pay any interest on your purchases. You may also have to pay an annual fee on your credit card.
Credit lines, however, have draw periods. A draw period is the period in which you can draw money from the account. This draw period will vary depending on the lender‘s terms and conditions. It could be as little as a few months or as long as several years.
When you borrow money on a line of credit, you’ll begin accruing interest. However, this will likely be at a lower interest rate than the APR applied to a credit card balance.
Much like a credit card, your line of credit will have minimum payments due each month. When you repay a portion of the borrowed money, these funds will become available again for you to use. When the draw period ends, you’ll enter the repayment period, when you’ll have a certain amount of time to pay off your remaining balance.
The average credit line limit can vary drastically based on your credit history. However, below are credit line limits for a few popular banks in the United States:
- Citi Bank: A maximum limit of $25,000
- SunTrust Bank: A maximum limit of $250,000
- Wells Fargo: A minimum of $3,000 and a maximum of $100,000
Your lender will review your credit report to determine the maximum amount of money you’re eligible to borrow. As is the case with credit card accounts, the best terms and highest credit limits are typically reserved for those with excellent credit.
Lenders review a few different things to determine your credit limit. Important factors include:
- Open accounts
- Payment history
- Available credit
- Credit utilization ratio, or how much of your available credit you are using
- Credit score
All of these factors will show up on your credit report. This report is provided by the three credit bureaus:
Credit limits are beneficial for two primary reasons. One, it provides you with more accessible funding. Even if you have a high credit limit, you are not required to use all of it. You should only use the amount of credit needed to meet your financial goals.
But, knowing that those funds are there can give you peace of mind if you are using the line of credit to do something like pay off high-interest credit card debt or renovate your home.
The second reason why credit limits are beneficial is that they can potentially improve your credit utilization ratio. Your credit utilization ratio measures the percentage of your total credit that you’re using and directly impacts your credit score. Lenders generally want to see your credit utilization ratio below 30%.
Let’s say that you borrow $5,000 on a line of credit. If your maximum credit limit is $5,000, your credit utilization rate is 100%. However, if you receive a credit limit increase to $20,000, your utilization rate is now 25%.
In summary, a credit line is beneficial because it increases your accessibility to funding, thereby boosting your spending limit. Credit lines are also beneficial because they increase your total available credit, providing an opportunity to improve your credit utilization ratio and credit score.
The easiest way to increase your credit limit is to ask your lender. Your lender will have a direct say as to whether your limit can increase. Suppose your loan or credit line is with a smaller firm where you have a personal relationship. In that case, you may have more success than asking a large credit card company like American Express, Capital One or Discover.
You might need to make your case for a higher credit limit when you ask your lender. If you have bad credit, you will be less likely to receive an increase. Building good credit will put you in a better position to make the case to your lender for a credit line increase. Improving your credit happens over time, not immediately.
It will likely help if you understand your credit score relative to others in your age group. Knowing whether you have a good or bad credit score could make it much easier for you to negotiate a credit line increase with your lender.
Tally is a credit card payoff app that makes it easier to pay down debt. Depending on your personal financial situation, it could be a worthwhile alternative compared to a balance transfer card or personal loan.
Tally uses credit lines to pay down debt1. After analyzing your credit profile to ensure you’re a good fit, Tally will transfer your high APR balances to the line of credit and make payments on the existing balances for you.
With a lower APR, you begin saving money immediately. You could put this money toward your credit card balances to help get out of debt faster. Tally credit lines are available to those who qualify with a Tally+ membership.
A credit line can provide you with access to funds, offering you financial flexibility. Depending on your lender, you may be able to use your funds to meet a wide variety of needs, including credit card payoff. Tally is an excellent example of how you can use a line of credit to pay down existing credit card debt.
The average credit line limit is a bit tough to measure since most financial statistics refer specifically to credit cards. Credit lines are similar to credit cards but are not quite the same. The primary difference between the two is the draw period that comes with lines of credit.
Your eligibility for a line of credit depends on your credit score. Understanding your credit score gives you a better idea of what type of limit you can expect and when you could potentially consider asking for a limit increase.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.90% – 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.