Does HELOC affect my credit score?

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If you are planning on renovating your home, you have the option to choose between a personal loan or a home equity line of credit (HELOC). Personal loans are more popular due to their simplicity and the ability to get unsecured loans in just a few days with fixed monthly payments. However, a Home Equity Line of Credit could get you a lower rate. For this reason, HELOC is rising in its popularity because of its potential for accessing credit at low-interest rates.

What is a HELOC?

A HELOC is a kind of revolving credit, like a credit card, where the lender sets your credit limit. You can keep borrowing within that credit limit. Your credit limit and the conditions are outlined in your HELOC terms, and you keep borrowing within that limit till what is called the ‘draw period.’ With HELOC you get a lower rate because you put up your home as collateral for the loan. Should you fail to pay back the principal and interest on the HELOC, the lender has the right to begin foreclosure proceedings. Simply put it means you could end up losing your home if you are unable to pay off the amount owed. When you have been approved for a HELOC the lender gives you specific credit or debit cards or special cheques. These might include an initial withdrawal maximum or a minimum withdrawal amount.

Does HELOC affect my credit score?

Potentially, if you use all of the available credit on your HELOC your credit score could be negatively impacted. Using all of your available credit is an indicator of high risk, this is true even if you make payments on time and even if you pay more than the minimum payment amount. For instance, if you have used up all of the available credit on your HELOC you no longer have an emergency source of funds in case a sudden unexpected expense comes up like a medical issue or pricey car repairs. Banks and financial institutions look more favorably on people who have not maxed out all of their credit. The best way to use the credit available through your HELOC is via strategic spending and repayment such as using the funds to complete home renovations. When you use your HELOC credit strategically it can boost your financial situation and have a positive effect on your credit score. As you keep paying down your HELOC, you will see a significant improvement in your credit score!

Will closing a HELOC affect my credit score?

Your credit score is partly determined by your credit utilization. When you close a HELOC it decreases the amount of credit you have, in turn affecting your overall credit score. Closing your HELOC impacts your credit score differently than closing a personal credit line or credit card. Typically speaking there is minimal impact on your credit score when you close a HELOC. For example, if you are in a situation where you no longer need a revolving line of credit and have paid off your HELOC in full closing the HELOC can be a good idea. In closing the HELOC you also close out the lien against your home. Additionally, if you are planning to sell your home you will need to pay off and close your HELOC before you complete the sale.

We would be happy to answer any questions you have on HELOCs. Contact us at 1-866-401-LEND today!

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