Opening a new line of credit is a good way to build your credit history, but it comes at a cost. When you open a new line of credit, you are announcing, “I need more money.” Creditors and employers expect you to open a new line when you experience great change: the start of college, taking a new job, or the birth of a child. If you open a new line for no apparent reason, it is an indication that you cannot manage expenses on your current income.
Avoid opening a new line of credit after significant negative events in your credit history. These include a bankruptcy filing, foreclosure, or loss of a job. If you open a new line of credit after this type of event, it suggests you will run up high expenses and sink into debt. Creditors and employers view individuals with debt as financially unstable.
Use opening a new line of credit as a way to show you are not a risk-taker. Do not simultaneously open multiple new lines. Stay away from packages that offer high spending limits or high interest rates. Make small purchases, such as a student loan payment. Think of using the new line for a single purpose, such as gas costs. This will show that you have a plan for the line and are not using it to cover multiple unforeseen expenses. Do not establish higher limits or discontinue the use of existing lines. Do not open a line of home equity credit. It is a sign that you are willing to lose your house. Think of using debit cards or secured lines of credit to show you can limit your purchases.
Consider opening a new line of credit when you start a business. Creditors and employers look favorably upon this action. They are aware that a new business can fail if it is undercapitalized. A new line of personal credit and a new line of business credit show that you are serious about making sure your business has enough money to operate. Think of opening a new line of credit far in advance of when you expect to file articles of incorporation.
It is helpful to complete a business plan before opening a new line of credit. Do not overthink how creditors and employers will view your first year’s balance. It is generally accepted that a business’s first year is its most tumultuous. Write a business plan that allows you to pay down the balance during the first few years of operation. Make regular minimum payments, but do not attempt to pay off the entire principal every month.
After opening a new line of credit for a business, avoid applying for additional new lines. This suggests you did not plan well. Think of carrying a greater balance on one line. It is risky to spread debt over multiple lines, especially if the debts relate to a similar purpose. Your goal is to show you will pay back all of your lenders.