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Line of credit

You may not think that you have really encountered the concept of a line of credit in your own experience of personal finance. But the chances are that you will have done.

Firstly, let's take a look at what this phrase actually means.

A line of credit usually refers to how much a financial institution such as a bank is willing to lend to a business or individual. Many people are used to thinking of this in terms of business, with many small businesses relying on this concept.

But it also has an important role to play in the world of personal finance. You're most likely to have encountered it when using your credit card.

It's likely that your bank or credit card issuer will allow you to make a number of purchases using your card. You won't have to call them each time that you use it. In effect, you can just build up a debt to them. That's because they've already agreed on a particular line of credit to you. You're probably familiar with this as being your credit limit.

That limit is likely to have been based on a number of factors, largely relating to your financial and credit history. If you're the type of person who makes regular credit card payments (always on time - never late) then you may very well be seen as being credit worthy. As a result, you may have an ever increasing credit limit.

You may see this as being a good thing, but is it? It can be, although the reality is that your limit may be set to a much higher level than you would ever intend to spend. If you're worried about the implications of this (especially in relation to credit card fraud) then you may wish to ask your bank, or credit card provider, to reduce your limit to a level that you are happy with.

Although some people are happy to see the line of credit extended, it's important that the level feels comfortable for you.