How To Avoid Hurting Your Credit Because Of A Home Equity Loan

[Mar 23, 2009.]

 

For quite some time, home equity loans and home equity lines of credit have been a great way for homeowners to tap into their equity. They can be used to pay off high interest credit card debt, fund large purchases and investments, or simply serve as an emergency fund for the future. However, there are instances where a home equity loan could actually hurt your credit score. Below is a short explanation of this problem, as well as a few tips for homeowners to avoid damaging their credit history.

Be Careful When Shopping Around For Any Type Of Home Loan
It is actually rather common for individuals to lose a few points on their credit when they take out any type of loan--whether it is a mortgage, home equity loan, or personal loan. In most situations however, this drop is almost negligible as it is typically only a few points. If you know your credit score sits right on the borderline, be careful when shopping around for your home equity loan. Specifically, avoid filling out too many applications since the credit bureaus may penalize you for numerous credit inquiries.

Keep Your Credit In Mind When Tapping Into Your Home's Equity
Aside from your credit history, borrowing more money than you need can become quite a temptation. Especially for those considering a home equity line of credit, avoid taking a larger line of credit just because you qualify for it. Unfortunately, having a larger line of credit often makes overspending too easy. As a result, utilizing more of your home equity loan will result in increased debt to credit ratios. Remember, credit bureaus base 30% of your credit score on your overall credit utilization--most advise individuals to keep their debt below 30% of the allowed credit limit.

Find Out How Your Home Equity Loan Is Interpreted
For those with a traditional home equity loan, it's likely that your loan is being reported as an installment account. For those with a HELOC, it could be reported as an installment account or a revolving credit account. The uncertainty remains because of the credit bureaus proprietary scoring model. However, it is important to find out how your loan is being interpreted as it can drastically affect your score. As an example, owing 90 percent of an installment account's balance does not count against you. However, owing 90 percent on a revolving credit account translates as a severe credit utilization which will hurt your credit score. To find out more detailed information, it's best to contact your existing mortgage lender as well as a credit specialist.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.