Line of Credit: Good Idea, or Bad Idea?
April 28, 2011 6:55 AM Subscribe
Financing company offered me a 2000$ line of credit. I have questions.
Questions: Is it advantageous for someone with less than stellar credit to obtain and responsibly use said line of credit?
My interest rate is retarded, prime +19.50% (my credit card is the same rate, and my car loan is not too far under that).
I don't really "need" the money, but should I apply, use it a little bit and pay it off right away? Will this help me establish more credit?
I need help mefi! Let the discussion begin.
Questions: Is it advantageous for someone with less than stellar credit to obtain and responsibly use said line of credit?
My interest rate is retarded, prime +19.50% (my credit card is the same rate, and my car loan is not too far under that).
I don't really "need" the money, but should I apply, use it a little bit and pay it off right away? Will this help me establish more credit?
I need help mefi! Let the discussion begin.
I think if you focus on paying your car loan and use your credit card occasionally and pay it off you will be much better off than taking money you don't need.
posted by Busmick at 7:04 AM on April 28, 2011
posted by Busmick at 7:04 AM on April 28, 2011
Response by poster: I know, the rate is horrible. It's all from making bad choices in my youth, and I'm paying for it now. My finances/spending are somewhat under control.
If I could get the line of credit and not use it, that'd be great, but I doubt that would help my credit score any, I think it'd actually hurt it due to having that amount of credit "tied up" in money that I'm not using, it'll still go against me wouldn't it?
posted by br4k3r at 7:07 AM on April 28, 2011
If I could get the line of credit and not use it, that'd be great, but I doubt that would help my credit score any, I think it'd actually hurt it due to having that amount of credit "tied up" in money that I'm not using, it'll still go against me wouldn't it?
posted by br4k3r at 7:07 AM on April 28, 2011
They might be interested in giving you a consolidation loan that will wipe out those horrible 19.5% interest bearing debts and replace them with a single large payment at a less-insane rate each month. Can't hurt to ask.
posted by rokusan at 7:09 AM on April 28, 2011
posted by rokusan at 7:09 AM on April 28, 2011
Unless you are specifically trying to get a loan for something don't worry about your credit score right now. The best thing you can do is show that you are responsible now by establishing a clean history i.e. pay off car; or manage a credit card. Also if you are good at paying your credit card give them a call and see if they can lower the rate...it cant hurt.
posted by Busmick at 7:11 AM on April 28, 2011
posted by Busmick at 7:11 AM on April 28, 2011
I think you should focus on debt rather than credit scores at the moment. What practical difference does it make whether your credit score is appalling or merely very bad? Take a look at Dave Ramsey's Total Money Makeover to get a good plan for putting your finances in order one step at a time. Focussing on one thing at a time works better (and more quickly) than trying to do 17 things simultaneously.
posted by MighstAllCruckingFighty at 7:19 AM on April 28, 2011
posted by MighstAllCruckingFighty at 7:19 AM on April 28, 2011
Adding a new line of credit will increase your total available credit and decrease your utilization ratio. A low utilization ratio will increase your credit score. As the line of credit ages it will also boost the age of your accounts which could also help your credit score. You should only consider this if you absolutely trust yourself not to use the line of credit, not even once. You should also only do this if you are sure the financial institution will not be scamy with fees, penalties, etc.
As others have pointed out it may not be worth really worrying about your credit score right now, but if you do want to worry then yes, it could help.
posted by ChrisHartley at 7:24 AM on April 28, 2011
As others have pointed out it may not be worth really worrying about your credit score right now, but if you do want to worry then yes, it could help.
posted by ChrisHartley at 7:24 AM on April 28, 2011
Best answer: Note: I'm not an expert on differences between credit ratings in the US versus Canada, but from what I can tell it's more or less the same system, so this advice is based on US credit ratings.
I don't really "need" the money, but should I apply, use it a little bit and pay it off right away? Will this help me establish more credit?
Not really. An unsecured personal line of credit is pretty much the same thing as a credit card (open-ended unsecured revolving debt). The main difference is that credit cards are more suitable for ongoing retail purchases, whereas a line of credit is more for getting a lump sum of cash. Getting a new credit account will help somewhat (especially if you keep it open for a very long time), but you would probably be better off with a credit card (as long as it doesn't have an annual fee). And really your existing credit card and loan are helping you establish a good credit history already so it's not a big deal if you just keep those. Especially since you have a bad score right now, getting a new account would just be a minor tweak, whereas continuing to keep your accounts open and never missing a payment over the next few years will make your score jump up considerably.
If I could get the line of credit and not use it, that'd be great, but I doubt that would help my credit score any, I think it'd actually hurt it due to having that amount of credit "tied up" in money that I'm not using, it'll still go against me wouldn't it?
Wrong on both counts for the most part. The amount of credit you have that you aren't using is counted for you on your credit score, not against you. You want the utilization ratio (debt to credit available) to be around 10%. Note that when you actually apply for a loan or whatever you need the good score for, you can usually tweak this number (such as by not making any major credit card purchases until after the loan gets approved). Also, your payment history should improve whether or not you actually use the account. There is no part of the credit score that gives you a bonus for having a high balance. The main reasons not to open a new account is that you get penalized for applying for credit (although those drop off of your report after a relatively short time) and for having a high percentage of new accounts (your average account age should be as high as possible, so don't close credit accounts unless it's costing you money to keep it open). Also there are factors other than your credit score that are evaluated in some cases, such as when you apply for something major like a mortgage and they take into account more aspects such as your income to debt ratio.
posted by burnmp3s at 7:28 AM on April 28, 2011 [1 favorite]
I don't really "need" the money, but should I apply, use it a little bit and pay it off right away? Will this help me establish more credit?
Not really. An unsecured personal line of credit is pretty much the same thing as a credit card (open-ended unsecured revolving debt). The main difference is that credit cards are more suitable for ongoing retail purchases, whereas a line of credit is more for getting a lump sum of cash. Getting a new credit account will help somewhat (especially if you keep it open for a very long time), but you would probably be better off with a credit card (as long as it doesn't have an annual fee). And really your existing credit card and loan are helping you establish a good credit history already so it's not a big deal if you just keep those. Especially since you have a bad score right now, getting a new account would just be a minor tweak, whereas continuing to keep your accounts open and never missing a payment over the next few years will make your score jump up considerably.
If I could get the line of credit and not use it, that'd be great, but I doubt that would help my credit score any, I think it'd actually hurt it due to having that amount of credit "tied up" in money that I'm not using, it'll still go against me wouldn't it?
Wrong on both counts for the most part. The amount of credit you have that you aren't using is counted for you on your credit score, not against you. You want the utilization ratio (debt to credit available) to be around 10%. Note that when you actually apply for a loan or whatever you need the good score for, you can usually tweak this number (such as by not making any major credit card purchases until after the loan gets approved). Also, your payment history should improve whether or not you actually use the account. There is no part of the credit score that gives you a bonus for having a high balance. The main reasons not to open a new account is that you get penalized for applying for credit (although those drop off of your report after a relatively short time) and for having a high percentage of new accounts (your average account age should be as high as possible, so don't close credit accounts unless it's costing you money to keep it open). Also there are factors other than your credit score that are evaluated in some cases, such as when you apply for something major like a mortgage and they take into account more aspects such as your income to debt ratio.
posted by burnmp3s at 7:28 AM on April 28, 2011 [1 favorite]
Response by poster: Thanks a lot for your comments, mefi, lots of good advice here. Keep it coming!
posted by br4k3r at 9:05 AM on April 28, 2011
posted by br4k3r at 9:05 AM on April 28, 2011
Response by poster: So, digging through the legalese on the application, it is going to cost me 49$ per year just to say I can borrow 2000$ then even if I don't use it (balance less than 100$) they're going to ding me 5$ a month. It is starting to sound like a shady deal IMO.
posted by br4k3r at 12:33 PM on April 28, 2011
posted by br4k3r at 12:33 PM on April 28, 2011
In that case it is 100% a bad idea. Avoid, avoid, avoid.
posted by ChrisHartley at 1:15 PM on April 28, 2011 [1 favorite]
posted by ChrisHartley at 1:15 PM on April 28, 2011 [1 favorite]
Right those are terrible terms. Which if you have bad credit right now is understandable, they give those sorts of terms to high risk borrowers so they can make a healthy profit even if a lot of them default. You might have better luck getting a credit card with a comparable limit that doesn't have those kinds of fees, because credit cards are more or less inherently profitable due to the percentage they get from every transaction. But right now you should be able to build your credit for free without opening any additional accounts.
posted by burnmp3s at 1:31 PM on April 28, 2011 [1 favorite]
posted by burnmp3s at 1:31 PM on April 28, 2011 [1 favorite]
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posted by br4k3r at 6:56 AM on April 28, 2011