What Is A Digital Credit Line?

Written by Banks Editorial Team
5 min. read
Written by Banks Editorial Team
5 min. read

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Many people find themselves in situations where a few additional funds could go a long way. Borrowing money for short-term expenses allows you to address emergencies without waiting to accumulate enough wages. You can then repay the debt over time. Unfortunately, some financing options are more trouble than they’re worth, with payday and car title loans leading the way. Other common funding sources, such as credit card cash advances, can get expensive.

A digital credit line is a viable solution to ease cash flow. You only pay interest on a virtual credit line when you borrow against it. Borrowers can tap into their digital credit line without submitting additional applications or incurring new fees. This structure is more cost-effective than continuously taking out credit card cash advances or applying for multiple loans. We will reveal how digital credit lines can impact your finances and credit score. 

Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

What Is a Digital Credit Line and How Does It Work?

A digital credit line contains funds you can transfer to your checking account anytime. You can use these additional proceeds to cover any expenses, but just like any other revolving credit line, you will have to pay interest. Unlike a traditional loan which requires interest payments right away, you only pay interest on a digital credit line if you borrow against the limit. Some people with lines of credit do not withdraw a penny. Instead, they establish credit lines to fortify their finances further. 

You can use a secured or unsecured line of credit. Secured lines of credit are tied to assets. For example, a home equity line of credit is a common type of credit line that is tied to your home. Unsecured credit lines have no collateral.

How Does a Digital Credit Line Differ from a Credit Card?

Every credit card comes with a credit line, but the two are not synonymous. Some credit lines do not have corresponding credit cards. You can tap into these credit lines by writing checks or transferring funds into your bank account. Although credit cards offer a simpler way to pay for everyday items, most borrowers also get lower APRs by using a credit line not connected to a credit card. However, credit cards have grace periods that let you temporarily avoid interest. These cards also include perks and rewards. While credit card perks can get redeemed, the rewards system incentivizes spending and can create dangerous money habits. 

How Can You Use the Funds on a Digital Credit Line?

Borrowers can use a digital credit line’s funds to purchase any good or service. You can use these funds to cover everyday purchases or buy more expensive goods and services. Credit cardholders often use their cards for everyday purchases and reserve their digital credit line to help ease the cash flow. 

Depending on your finances, a digital credit line can also help with debt consolidation. You should only use a digital credit line for debt consolidation if interest rates on your other debt exceed the APR on your virtual credit line. Since lines of credit usually have lower interest rates than credit card balances, you could use the digital credit line to pay off some of your credit card debt. 

Advantages of a Digital Credit Line

Adding a digital credit line to your finances provides numerous advantages. We have outlined some of them below:

  • Access to more funds: A line of credit lets you tap into additional cash. You can use the cash to finance any purchase, providing immense flexibility. A credit line will increase your purchasing power.
  • You only pay when you borrow against the credit line: When you get an installment loan, you’re committed to paying interest immediately. Installment loan interest will continue accumulating even if you do not spend the principal. Virtual credit line interest does not accrue until you borrow against the credit limit. You can hold onto a digital credit line for years and never pay interest if you don’t borrow any money against it.
  • Lower your credit utilization ratio: A digital credit line will improve your credit utilization ratio, a category that makes up 30% of your credit score. Credit utilization measures how much you have tapped into your credit limit. If you have borrowed $4,000 against a $10,000 credit limit, you have a 40% credit utilization ratio which isn’t optimal. Borrowers should have a utilization ratio below 30%, and a digital credit line helps you achieve this goal.
  • Build your credit with on-time payments: The major credit bureaus receive information about your credit line’s payment history. Five categories impact your credit score, but none have as much of an impact as payment history. Payment history makes up 35% of your FICO score, and paying a digital credit line on time will increase your score. A higher credit score will help you qualify for better mortgage or auto loan terms.
Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

Disadvantages of a Digital Credit Line

Digital credit lines have plenty of advantages, but it’s also beneficial to know the risks. Keeping the pros and cons in mind will help you make the best decision for your finances.

  • You have to pay interest on the money you borrow: Having a credit line gives you access to more cash. While extra funds can help you cover emergency expenses and other costs, using a digital credit line for personal expenses can result in snowballing debt. Poor money habits and more money don’t mix well together and can lead some borrowers into a downward spiral.
  • Interest will make it harder to pay off the principal: You can only become debt free if you make progress on paying off the principal. Interest acts as a shield, making it more difficult to chip away at the principal. Small interest payments won’t give you much trouble, but if you let the balance grow considerably, it can feel like an uphill battle to make any progress.
  • Some digital credit lines have variable interest rates: The lender can increase your interest rate or change your credit limit at any time. It’s part of the contract. Higher interest rates will make your existing debt more difficult to catch up on, and there isn’t much you can do about rising interest rates. It will affect your current balance. Quickly paying off your credit line will minimize this issue or make it nonexistent if you never let your balance linger.
  • Your credit score can take a hit: On-time payments and a reduced credit utilization ratio will improve your score. However, missing payments and getting too close to your credit limit will have the opposite effect. The credit score benefits or downfalls of using a digital credit line depend on your financial health and commitment to repaying debts in a timely manner. Applying for a credit line may trigger a hard inquiry, reducing your credit score by a few points. Some lenders like Grain do soft credit checks, which will not impact your credit score.

Where to Get a Digital Credit Line

A digital line of credit gives you extra capital and can help build your credit. However, most creditors will ask for your credit score before giving you a credit line. This creates a Catch-22 for many consumers who want a line of credit. 

Grain came up with a solution to this problem. That is why they work with community banks to serve underserved communities to make digital credit lines easier to access. Instead of solely assessing you based on your credit score, Grain offers a line of credit up to $1,000 based on your cash flow. The Grain financial app can connect to your debit card and use your activity to determine your credit limit. Grain’s virtual credit cards offer a safer alternative to physical cards. You can access their features by downloading the Grain app today.

Get a Digital Credit Card
Access a revolving line of credit based on your cash flow, not your credit score, with the Grain digital credit card.

Disclaimer: Credit offer based on cash flow in the linked checking account and may require a credit check. All accounts are subject to ID verification and approval. See your Credit Agreement and Terms of Service for further details.

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