How to Use a Home Equity Credit Line

Whether you need a new roof, the transmission just went out on the car or the bills are piling up and you are afraid your credit is going to be negatively affected, the need for money can come out of the blue and cause stress in your life. If you have equity built up in your home, it may be possible for you to take out a home equity line of credit; however, it will have to be paid back. Using a home equity line of credit can help you avoid a financial crisis.

Step 1 - Track Checks Used

Keep track of checks written and debit card uses against the credit line. When you obtain a line of credit based on the equity in your home, the bank will provide you with a checkbook or a debit card that is tied only to that line of credit and separate from any other accounts you may have with the bank. As you write checks or swipe the debit card for purchases it is important that you maintain a record of such use so that you are always aware of how much is left in the credit line.

Step 2 - Make Balance Payments

Make payments on the balance. A home equity line of credit is treated similar to a revolving charge account, in that when you pay down some of the balance those funds become available to you again. For example, if you have a $20,000 equity line of credit and you spend $5,000, you will be left with a $15,000 line of credit. If you then make a $3,000 payment, you will be left with an $18,000 line of credit.

Step 3 - Pay More than the Minimum

Pay more than basic interest rates. You will be expected to pay interest on your equity line of credit. If you want to get ahead, get it paid back and reduce the amount of total payback, you will need to make payments that are larger than the basic minimum interest payment. When you send in your monthly payment, be sure to note that anything beyond the interest payment is to be applied in its entirety to the principle. This will help reduce the amount you owe.

Step 4 - Stay in Communication

Communicate with the bank. If you find you will not be able to make a payment on time, communicate with the bank as soon as you are aware of the delay. By doing so you have a better chance of the bank working with you and allowing you to catch up without placing the late payment on your credit rating. Focus on making payments on time as often as possible to protect not only your credit rating but to maintain a good relationship with the bank.

Step 5 - Use it for Necessities

While a trip to Aruba next month sounds fun, you will be paying interest on the trip and will have used money that you may need if the roof needs repair in a few months. It is better to save for that trip and only use the home equity line of credit for emergencies and necessities. You only pay interest back on the money you use, so leaving the funds in the bank will not cost you anything.