A bad credit score can make it increasingly difficult for a homeowner to successfully apply for and get a home equity line of credit. A low score is usually an indication of not being able to pay all your bills on time, being in default on current or old loans, or to much outstanding debt which shows potential lenders a bad debt to income ratio.
So just what is a credit score you may ask? It is a value that is obtained through a variety of calculations based on your current financial situation that returns a score between 300 to 850. It was created by the Fair Isaac Corporation to help lenders determine the interest rate that will be charged to homeowners applying for home equity loans.
If you have a low credit score you will pay a higher interest rate. If your credit score is above 700 you have a much better chance of obtaining a line of credit with a competitive interest rate. Lenders will also use your credit score to determine whether or not you are a good candidate for a loan in the first place. This score can also be used to determine how much credit they will extend to you.
There are three different credit agencies in the United States, Experian, TransUnion, and Equifax. They are the primary agencies responsible for calculating credit score with each of them scoring a little bit different. If you have low credit you can ask for a free copy of your credit report from all three agencies. This will allow you to see what the problems are and what you can do about it.
Raising your credit score to receive more favorable terms on a home equity line of credit can be done with a little time and patience. Once you have your credit report the first thing you need to look for are false claims of money you owe. If you can prove that you have mistakes on your report you can start to raise your score.
Another way to boost your credit score is to be caught up on all your current payments and pay down as much debt as you can. The more unencumbered credit you have the higher your score. This does not mean to get more credit but to take care of the credit you do have. A score of 640 or less is a sign of bad credit to most lenders and will require you to take action to correct the problem.
Surveys show that nearly 80% of all credit reports contain mistakes of some sort. This is why it is important to check your credit report from all three agencies at least once a year. Doing so can save you thousands of dollars in interest.
Getting a bad credit home equity line of credit is possible, but the interest rate and terms of repayment will not be favorable to you. It is much better to try and raise your credit score before applying for any type of loan for the simple fact that you want to keep as much money in your pocket instead of your lenders.
