Understanding Lines of Credit and the Average Credit Line Limit
A line of credit allows you to borrow money, but be mindful of limits that lenders put in place.
July 31, 2022
Americans have an average credit card limit of around $30,000, according to Experian. However, this statistic doesn’t account for other lines of credit. Though similar, lines of credit (or credit lines) are technically different from credit cards.
In this article, we’ll discuss what credit lines are as well as what average credit line limits look like. We’ll also cover why credit lines are beneficial, what factors go into determining their limits and what borrowers can do to secure a higher credit limit. By understanding what a line of credit is and how you can use it, you can better manage your finances.
What is a credit line, and how is it different from a credit card?
A line of credit is a lending tool offered by financial institutions like banks or credit unions.
A revolving line of credit is very similar to a credit card. Both come with preset borrowing limits, meaning you can't borrow more than a certain amount without first paying off a portion of the balance. They are also revolving, meaning that as you pay off your balance, your available credit replenishes.
For instance, let’s say that you have a revolving line of credit with a $5,000 limit; you can borrow up to $5,000. If you pay off a portion of that balance, you are eligible to borrow that money again.
If you borrow the full $5,000 and then pay off $1,000, your remaining 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:
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.
Much like a credit card, your line of credit will have minimum monthly payments. When you repay a portion of the borrowed money, these funds again become available for you to use.
It’s also worth noting that some banks also offer non-revolving lines of credit. With these one-time arrangements, the account is closed after the borrower pays off the balance of the loan.
The differences between credit lines and credit cards
The first difference: Your credit card issuer allows you to borrow money on your card as you please, as long as your account is in good standing and your balance remains below the credit limit. As long as the card isn’t maxed out and you make monthly payments, you can continue to use it.
Credit lines, on the other hand, have specific draw periods — the period in which you can draw money from the account. This draw period varies depending on the lender's terms and conditions. It could be as little as a few months or as long as several years.
When the draw period ends, you'll enter the repayment period and have a certain amount of time to pay off your remaining balance. Unlike a credit card, you can’t draw more money during this time, even as you pay off the balance.
Another difference to keep in mind is if you fail to pay off the remaining balance during the repayment period, your lender can directly withdraw money from your other accounts to “set off” the balance. Credit card lenders can’t do this.
Interest rates and how interest is accrued are also different from credit cards. When you use money from a line of credit, you'll begin accruing interest right away. However, this will likely be at a lower interest rate than the APR applied to a credit card balance. But you can avoid credit card interest charges altogether if you pay your balance in full every month.
In addition to interest rates, you’ll want to be aware of any fees associated with lines of credit and credit cards. Depending on the lender, either can come with an annual fee.
Last, credit cards can come with perks that lines of credit don’t have. The best credit card companies incentivize cardholders with reward programs like cash back or travel points. American Express, Capital One, and Discover often provide customizable rewards options so you can select the rewards that best fit your lifestyle.
What is the average credit line limit?
Credit line limits can vary drastically based on the type of line of credit as well as your credit history and FICO credit score. However, below is some credit line information for a few popular banks in the United States. Note that the type of credit lines offered can vary from bank to bank.
Citibank offers a variable-rate line of credit to provide overdraft protection and access to quick cash. They don’t publish their available credit limits.
Bank of America offers home equity lines of credit for up to $1,000,000 for primary residences and up to $500,000 on second homes or vacation homes.
Wells Fargo only offers business lines of credit. Their credit line limits range from $5,000 to $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 scores.
What factors determine credit limits?
Lenders review a few different things to determine your credit limit and the interest rate you’ll receive; one of the most important factors is your overall credit score. With an excellent credit score, you may be able to obtain a high limit.
Important factors that influence your credit score include:
Payment history, particularly whether you have made on-time payments or missed payments with other lenders
Credit utilization ratio, or how much of your available credit you are using
How much debt you currently have
Number of hard inquiries, such as from applying for a new credit card or a mortgage
The length of your credit history
All of these factors show up on your credit report and determine your credit rating. This report is provided by the three major credit bureaus.
In addition to your credit score, most lenders also evaluate your annual income to determine your ability to repay a line of credit. If you have other open accounts with a balance due, this could affect your ability to pay off a higher line of credit based on your income level. As a result, you’ll get a lower credit limit. With a higher income and fewer debts, you can obtain a higher limit.
Why are credit lines beneficial?
A line of credit is beneficial for two primary reasons.
First, it provides you with more accessible funding. Even if you have a high credit limit, you aren’t 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 pay for large purchases like a home renovation.
Second, credit lines are beneficial because they can potentially improve your credit utilization ratio. Your credit utilization ratio measures the percentage of total credit that you're using and directly impacts your credit score. Lenders generally want to see your credit utilization ratio below 30%.
For example, say you have $5,000 on a credit card. If your maximum credit limit is $5,000, your credit utilization rate is 100%. However, if you open a line of credit with a $20,000 limit but use none of it, your utilization rate is now 20%.
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 (as long as you keep up with payments on all of your open accounts).
How can I get a higher credit limit?
The easiest way to increase your credit limit is to ask your lender. After all, your lender has the final say as to whether your limit can increase.
You might need to prove your ability to handle a higher credit limit when you ask your lender; if you have bad credit, you’ll be less likely to receive an increase. Building good credit will put you in a better position to make a good case to your lender. Working to build credit happens over time but is well worth the effort to improve both your FICO score and your finances.
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.
Timing can also make a big difference when asking for a credit limit increase. Typically, you should ask after you’ve been a customer with the lender for a while, as you’ll have established a good payment history with them.
Another good time to ask for a credit line increase is after you get a raise or a higher-paying job. An increase in income means you can handle more expenses, which could also help you qualify for a higher limit.
Use your credit line to improve your financial situation
The average credit line limit is a bit tough to measure since different lenders offer varying amounts for personal, business, and home equity lines of credit.
More important than knowing the average credit line limit, however, is understanding the factors that determine your limit, interest rate and eligibility. Your eligibility for a line of credit depends on your credit score and annual income. Understanding your financial situation gives you a better idea of what type of limit you can expect and when you might consider asking for a limit increase.
Depending on your lender, you may be able to use your funds to meet a wide variety of needs, including credit card payoff. Tally’s† credit card payoff app offers a lower-interest line of credit to help you pay down higher-interest credit cards.
†To 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% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.