If you have built up equity, you can tap into it and use that money to make home improvements, pay off credit cards or handle other expenses. Homeowners often wonder how using their equity might impact their credit scores.
Your Scores Will Fall Temporarily
Whenever you apply for a home equity loan, home equity line of credit, auto loan or credit card, the lender will check your credit. A hard inquiry will cause a small, short-term drop in your credit scores. The exact size of the decline and the amount of time it will take for your scores to recover will depend on several factors that are specific to you.
How You Use Your Equity Is Important
Your credit utilization ratio (the percentage of your available credit that you are using) is one important factor that influences your credit scores. If you take out a HELOC and you use most or all of your available credit, that can cause a dip in your credit scores. If, on the other hand, you only use a small portion of your available credit, your credit utilization ratio will fall, which can raise your credit scores.
A home equity loan is a different type of account. While a HELOC works like a credit card, a home equity loan provides money in a lump sum and is paid back in regular installments. Since your mix of accounts is another factor that determines your credit scores, taking out a home equity loan might improve your credit.
You Can Help Your Credit Quickly Recover
If you’re concerned about a dip in your credit scores after taking out a home equity loan or HELOC and you want your credit to rebound as quickly as possible, there are a few simple things you can do. One is to stay on top of your bills and pay them on time.Â
You should also keep your overall credit utilization ratio down. Avoid accumulating new credit card balances, postpone large purchases or pay with cash, and focus on reducing or paying off your outstanding credit card balances.Â
Don’t open new lines of credit shortly after taking out a home equity loan or HELOC. Opening new accounts causes a temporary dip in credit scores. If you open multiple accounts in a short amount of time, that will have a greater impact on your credit profile.
Manage Your Credit Well
If you take out a home equity loan or HELOC, expect your credit scores to experience a small, temporary drop. If you handle your credit responsibly, make payments on time and reduce your outstanding debt levels after you tap into your home equity, your credit scores should quickly return to their previous levels.Â
