What is a line of credit? Here we tell you
“You have a line of credit for 15 thousand pesos.” You’ve probably heard a very similar phrase. It is common in institutions such as banks.
But very few people understand what it means and reach it. In fact, some unpayable debts start here. If you have a credit line you could be the next person on the call list of collection offices.
In this post we will tell you what a credit line is, how it works and some things that you should keep in mind to keep debts at bay and you can live in peace of mind.
What is a line of credit?
It is a form of financing where the user can have up to a certain amount and only pays interest for the money he uses.
The most common form of a credit line is a credit card. The bank makes an analysis of your financial profile and determines your borrowing capacity, which will be the limit you can use with your card.
For example: if you have a credit card with a line of 15 thousand pesos and during “El Buen Fin” you use 7 thousand, you will still have 8 thousand available and you will only pay interest for the amount you spent.
The amount spent and the amount available is the weakness of credit card users, as few are aware of what they have used and what they must pay the following month to avoid interest.
This is very common in short promotions such as night sales and “The Good End.” Due to the euphoria for discounts, users forget to count the amount spent on their credit.
How does the bank determine your line of credit?
The way in which the bank determines it is very simple: from your income you subtract your expenses and the money available per month multiplies it by the number of months in which you can pay (it depends on each bank). It is usually up to 18 months.
For example: imagine that someone named Juan has the following financial profile (monthly):
Revenue: 15 thousand pesos monthly
Rent: 4 thousand pesos
Pantry: 5 thousand pesos
Gasoline: 1 thousand 600 pesos
Automotive credit: 3,500
Total expenses: 14 thousand 100 pesos
Available money: 900 pesos
900 x 18 months: 16 thousand 200 pesos
With the previous example, Juan’s credit line could be 16,200 pesos. Even the amount may be less so as not to compromise Juan’s 900 pesos available.
Imagine that instead of 900, the bank calculates with 500 to give you a line of 9 thousand pesos. That way the bank reduces the risk of credit default.
Recommendations to manage your line of credit
- With the previous example you can know your borrowing capacity, or credit line. Do your calculations.
- If you are going to pay with your credit card write down all your purchases and save your tickets. Avoid using to the limit.
- Use your line when strictly necessary and if you can pay the debt the following month, even in installments.
- Do not wait for your account statement to arrive, regularly visit your bank’s portal to know the status of your card at any time.
- Remember: the credit is not for an emergency (if you have an emergency you may not be able to pay it and borrow with interest)
- The credit card is money that the bank has lent you and that you must pay.