Home equity lines of credit and bad credit, perfect marriage.

Home equity lines of credit and bad credit, perfect marriage.

Why on earth would a home equity line of credit be good for you if you have a bad credit score or history? Relax, sit down, take a glass of your best wine and see how your home loan can open the door to good credit score and a bit of extra cash in the bargain.

Bad credit history and scoring comes from irregular payments of your home loan or mortgage. If you pay late or not at all, banks and financial institutions understandably don´t appreciate this and score your credit history negatively. Once you have a bad credit score it might be difficult to get reasonable loans. Your existing home loan or mortgage comes to the rescue. You can use your existing home loan equity to open a line of credit.

What is your home equity, your home equity is the difference between the value of your home and what is still left to pay for it. If you have a home that costs 150,000 $ and you only have 25,000 $ to pay, your equity is of 125,000 $. For more information on home equity loans please view this article.

What is a line of credit? A line of credit on your home loan works very similarly to a credit card. Just with lower interest rates, as it is a much lower risk loan for your friendly bank or financial institution. It is also very similar to an overdraft facility where your bank allows you to go over and above your balance up to a certain amount for interest. Let´s illustrate this: You have bad credit and have had bad experiences trying to get a loan. However you own a home that since you bought it has increased in value and therefore have a considerable equity on your home. You need money quickly so you ask your bank or financial institution to provide you with a line of credit on your home loan. This means that you will be able to withdraw funds up to the limit of your home loan line of credit. The interest rates on your line of credit will be softer than other loans because the bank has your home as security and will always lend well below the equity of your home. They are confident they can cover their losses if you fail to pay your monthly payments.

The benefit is that if you are sensible with your borrowing and only borrow a small percentage of your line of credit, this will a) provide you with much needed cash and b) improve your credit scores. Banks and financial lending companies like it when you have access to credit and you only use some of it. It shows you are under  control of your spending and will not get into more debt than you can handle. A customer that regularly gets into debt, but always pays is the perfect customer for lending companies.

So go ahead, get a home loan line of credit, spend sensibly and see how your credit score grows.