The credit line plays an important role in both overdraft and credit card. It is the maximum limit up to which an account can be overdrawn. For example, if the overdraft facility is USD 2,000, the line of credit is USD 2,000.
The line of credit – a revolving loan
Basically, the credit line is not a one-off, but a revolving loan. Specifically, this means that it can be used at any time, repaid in whole or in part and then used again.
A credit line can also be set up on a business account. Here, however, we are not talking about an overdraft facility, but a current account credit.
Requirements for a line of credit
Opening a private checking account or a business account for the self-employed does not necessarily mean setting up a credit line. To do this, certain conditions must always be met.
Employees, workers or civil servants generally only get a credit line in their checking account if they can prove that they have a perfect Credit Bureau information, permanent employment and a sufficiently high income.
The amount of the overdraft facility is determined individually and is based almost exclusively on the amount of the monthly income. Often two to three months’ salary is common.
Overdraft facility – freely available at any time
A very important advantage of the overdraft facility is that it is freely available to the customer at any time and can then be repaid individually. In most cases, the repayment is made using the regular monthly incoming payments that are offset directly against the credit line.
However, the constant availability of the overdraft facility should under no circumstances lead to the fact that it is used continuously. The account holder should at least make an effort to repay regular installments in order to at least seek a positive balance in the checking account in the medium or long term.
The current account credit for self-employed and freelancers
All persons who have registered their own business or are engaged in a freelance activity should consistently separate their private and business expenses and therefore also open a business account.
If the relevant conditions are met, the bank will also approve a current account credit on the business account. With the help of this credit line, it is then very possible to bridge short-term financial bottlenecks or to make major purchases.
Credit line for credit cards
The establishment of a credit line is also an essential part of every credit card contract. The only exception are the so-called prepaid credit cards, which are only kept in the credit.
If the credit line has been used in whole or in part, it can be repaid either in installments or in an amount. The respective credit card contract regulates the details. Often a certain minimum amount is also required, which is to be repaid monthly.
In general, it can be assumed that the credit line of a bank or credit card customer is higher, the better its credit rating is assessed and the higher its monthly income.