Credit Advice

Home equity account not likely tied to payment of other debts

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Credit Advice

Home equity account not likely tied to payment of other debts

Dear Experian,

If we open a home equity loan account and one of us has a drastic reduction in the credit score related to our individual accounts, but the home equity loan is paid and maintained as agreed, would that situation have any impact in the home equity loan credit limit?

- HYG

Dear HYG,

I doubt payment problems on other accounts would affect your home equity line of credit. The only way to know for sure is to carefully review your contract with the lender.

A home equity line of credit is a secured credit agreement. If you don’t make the payments as agreed, the lender can take your house and sell it to recover the money you owe.

Therefore, you need to use this type of credit with caution. It can be used to repay other types of credit and consolidate existing debts at a lower interest rate so that you can repay it more quickly. It only should be used as a lower cost alternative to other debt as opposed to a new way to take on additional debt that you may not be able to repay.

Because it is a secured credit agreement it is unlikely that its terms would be tied to your payment of other debts.

Credit card contracts sometimes include what is called a universal default clause that says if you fail to pay as agreed on any other account, the credit card provider can automatically increase your interest rates or decrease your credit limits.

Unlike a home equity line of credit, credit cards are not secured debts. There is no collateral for the credit card company to repossess and sell to recoup losses. Risk to a credit card company increases dramatically when a person starts having problems paying other debts.

By raising interest rates or decreasing credit limits, the credit card provider discourages a person from making additional purchases, hopes to encourage them to make payments in full and on time, and minimizes any losses if the person is unable to pay.

The only way to know if your home equity line of credit includes the possibility of a change in your terms is to review your contract. The agreement should tell you what could affect your home equity line.

Thanks for asking.

- The "Ask Experian" team

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