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What Is a Credit Line?

When a financial institution, such as a bank, extends a certain amount of credit to an individual or another entity, that is called the credit line. Another term for credit line is line of credit. For individuals, the limit for his or her credit line is determined by his credit rating. The credit rating is the number assigned by a credit bureau and is used to determine just how risky an individual is when it comes to paying loans back. The credit rating is a result of a credit check, which takes into account financial transactions, assets, liabilities, and so on.

The average person will encounter one kind of credit line the most: the credit limit on a credit card. Each credit card comes with an upper limit as to how much the card holder can purchase. In this case, that limit is the person’s line of credit extended by the credit card company or the bank.

Business owners might be more familiar with credit lines, as many business operate on the premise of credit. They may have a credit line from their bank or from suppliers. In this context, the credit line is given with the goal of equipping the business to run on a daily basis. More so, the line of credit can be used for other purposes such as expanding the business.

Another kind of credit line is the home equity line of credit, or HELOC. In this case, the credit line is based on the equity on a home - the difference between what the owner owes on the property and the market value of the property.

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