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How Your Creditworthiness Defines Your Credit Line

Author : Ask Bill

Approval for any kind of loans depends on whether banks or credit card companies consider an individual a good risk. There are several deciding factors which influence this. Before elaborating on what are the variables and how they play a role in approval of any credit, let’s see what a credit line is. Credit line is an arrangement in which the bank or creditor extends a specific amount of unsecured credit for a specified period of time. This article focuses on the variables that affect the credit line and also how your creditworthiness determines your credit line.
Variables that affect an individual’s credit report are based on the following five factors which in turn influence his or her credit score and ultimately the credit line. Credit score is a numerical expression based on analysis of a credit file of an individual and indicates his or her financial stability.
Payment history counts for almost 35% of your credit score. It measures your on-time payments of your bills and consistency in clearing your debts. Any gap between your payments or any bad credits will be indicated here. The kind of bills owed on, the total amount of bills with a balance unpaid, and the sum of accounts that have a balance all add to show your payment history. Hence it is said to be one of the best indicators for the lenders to signify whether or not you will pay.
Credit utilization is one of the important parameters that give the lender an idea of your credit-worthiness and takes almost 30% of your credit score pie. Credit utilization is a simple equation and measures how much of your available revolving credit is being used each month. Having too many credit cards which are maxed out will be considered a poor credit risk as it would convey a message to the lenders that you are struggling to pay off the debt.
The third factor that establishes your credit score is the extent of time you have been using your credit and it accounts for about 15%. The longer you maintain accounts in good standing, the better your score will be. The duration of credit history will probably affect people who recently own a credit card; if you possess no credit history to speak of, then its duration becomes more imperative.
The fourth factor is the type of credits used which counts for 10%. It is advisable to have a good mix of credit accounts like credit cards, mortgage, car loans and other loan accounts. Having too much of one type of credit can have a negative impact as credit bureaus don't think this accurately represents a person's ability to promptly pay all types of loans.
Lastly, the number of new credit applications you have recently completed, accounts for about 10% of your score. Applying for too much new credit in a short time period indicates that you could be at credit risk.
Generally speaking, to determine your credit line, a score that is over 720 is often considered an excellent credit score. A score of 680 – 719 is considered good. A score that falls between the range of 620-679 will usually make the lender scrutinize the file further. Having a score that is between the range of 585-619 will typically disqualify you from getting the best rates. A score below 584 will make many lenders question whether or not they want to do business with you.
In conclusion, creditworthiness is defined as being financially established to the point where lending credit is deemed a sound judgment by a bank or financial institution. Therefore, diligence in making your payments on time and regularly checking your report to improve your credit score or to maintain your creditworthiness are two of the most important things you can do to ensure you remain in balance financially.

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Tags:   credit line, credit report, bad credit

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Submitted : 2010-10-08    Word Count : 647    Times Viewed: 314