How Does a Home Equity Loan Affect Your Credit?
Thinking about borrowing money using your home’s value? You might be considering a home equity loan. It’s a common way people pay for big expenses like home improvements, medical bills, or even college tuition. But before you take that step, you’re probably wondering what it might do to your credit.
Your credit score matters more than you may think. It affects your ability to borrow money in the future, the interest rates you’ll get, and even your chances of renting an apartment. If you’re already worried about your credit, it makes sense to understand how a home equity loan will impact it. Let’s take a closer look at what happens to your credit when you take out this kind of loan and what you can do to protect it.
What Is a Home Equity Loan and How It Impacts Your Credit
A home equity loan is a type of loan where you borrow against the value of your home. Basically, your home is used as collateral. You receive a lump sum of money and then pay it back in fixed monthly payments over time. If you miss too many payments, the lender could take your house. But when managed properly, a home equity loan can be a smart financial tool and it can affect your credit in a few different ways.
When you apply for a home equity loan with AmeriSave, your credit will likely take a small hit at first. That’s because lenders perform a hard credit check to see if you qualify. These checks lower your credit score by a few points. It’s usually temporary, but it’s still something to keep in mind, especially if you’re planning to apply for other loans soon.
Once approved, the loan shows up on your credit report as a new account. This changes your credit mix, which is one of the things that affects your credit score. Credit mix refers to the types of credit you have, like credit cards, car loans, or mortgages.
Paying Your Home Equity Loan on Time Is Key
Your payment history is the biggest factor in your credit score. If you pay your home equity loan on time every month, it will likely improve your credit score over time. On the other hand, if you make late payments or miss them completely, your score can drop quickly. And since this loan is tied to your home, missed payments could put your home at risk too.
That’s why it’s important to be sure you can handle the monthly payments before you sign anything. If you’re already struggling to manage your finances, taking on more debt could hurt your credit instead of helping it.
A Home Equity Loan Can Increase Your Credit Utilization
Credit utilization is how much of your available credit you’re using. This mostly applies to credit cards, but installment loans like home equity loans can still play a part. When you get the loan, it raises your total debt. While this won’t directly impact your credit utilization in the same way a credit card might, having more debt can make lenders think you’re taking on too much. That can hurt your chances of getting approved for future loans.
However, if you don’t max out your credit and you make your payments consistently, your credit score should stay stable—or even rise. That’s why using the loan responsibly is so important. Don’t borrow more than you need, and don’t use the money for things that won’t add value in the long run.
