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When banks and other financial institutions make decisions to scale back on their credit offerings, it can have ripple effects on the personal finances of their customers. These changes can target lines of credit, which may be used to consolidate high-interest credit or for other needs, and ultimately harm the credit scores of those affected. So, what do you do if your bank winds up closing your personal line of credit? Your options include getting a personal line of credit from another lender, taking out a personal loan or opening a new credit card account.
What Is a Personal Line of Credit?
Similar to a home equity line of credit (HELOC), a personal line of credit lets you borrow money from a pool of available funds at any time during what's known as the "draw period," which lasts several years. You pay interest only on the cash you actually borrow, not your entire borrowing limit. By contrast, a personal loan provides a lump sum of cash that you begin repaying (and paying interest on) right away.
You can use money from a personal line of credit for many purposes, such as consolidation of high-interest credit card debt, a home improvement project or a vacation. Once you've paid back any cash you've borrowed, the full amount of money authorized under a personal line of credit once again becomes available.Personal lines of credit are frequently used to fund big-ticket purchases, while people often turn to credit cards for smaller purchases. Interest rates on personal lines of credit tend to be lower than interest rates on credit cards, especially for borrowers with good credit scores.
How Does Closure of a Personal Line of Credit Affect Your Credit Score?
Similar to a credit card account, a personal line of credit is a form of revolving credit. In both cases, a lender enables you to borrow against an approved credit limit and pay off the debt over time. Both credit card accounts and personal lines of credit also affect your credit scores, based on how you handle these accounts.
The FICO® Score☉ and VantageScore® credit scoring models place a lot of emphasis on how you manage your revolving credit. In particular, they keep a close eye on how much of your available credit you're using (your credit utilization). As your credit utilization climbs above 30%, your credit score could suffer. When a personal line of credit is closed, that chunk of available credit is lost, which could cause your overall credit utilization ratio to go up.
In addition, closure of a personal line of credit decreases the number of accounts you have and could reduce the average age of your accounts. Both of these factors can affect your credit score, but not to the same extent that a high credit utilization ratio can.
If you get enough notice that a lender plans to close your personal line of credit, consider reducing the balances on your other debts to potentially cushion any blow to your credit score.
Options When a Personal Line of Credit Is Closed
Fortunately, closure of a personal line of credit doesn't dry up the availability of credit. If a bank has shut down your personal line of credit, take a look at:
- Getting your credit in shape: If you're concerned about how an account closure might affect your credit score—and your ability to take out a personal loan, auto loan or mortgage, for instance—you might want to work on boosting your score. One way to do this is by decreasing the balances on your other credit accounts while not taking on more debt. This can lead to a lower credit utilization ratio, which in turn can help your credit score and can open up more borrowing opportunities.
- Finding another lender: If you've got a good credit score, a lender may be eager to let you open a personal line of credit. This could let you still enjoy the borrowing flexibility you're seeking without much disruption.
- Applying for a personal loan: A personal loan may be able to fill the borrowing gap left by the closure of a personal line of credit. Keep in mind, though, that unlike a personal line of credit, a personal loan provides a fixed amount of money upfront, starts charging interest right away and requires fixed payments over a fixed period of time.
- Obtaining a new credit card: A credit card also may be a viable alternative to a personal loan of credit. Remember that credit cards typically come with higher interest rates than you'd get from a personal line of credit, but 0% intro APR offers are available. As you're shopping for a credit card, be sure to check out Experian's card comparison tool, which can pair you with a credit card suitable for your needs.
The Bottom Line
Whatever option you pick if a personal line of credit is closed, stay on top of your credit by signing up for your free credit score, free credit report and free credit monitoring from Experian. Understanding your credit before you make any major decisions can help you narrow down your options and plan ahead in a smarter way.