Today we’re going to discuss how a HELOC (Home Equity Line of Credit) can negatively impact your credit. Odds are some of you out there have tapped into the equity in your home to finance your business endeavors. Quick and easy right? Yes, but it may have devastating effects on your personal credit. You’ve done everything you’re supposed to, paid on time, and have no clue why your score went south. Here’s why:
30% of your personal credit score is made up of how much of your credit has been utilized. Of particular importance to a lender is the percentage of your revolving you have used. When that number exceeds 30% your scores can suffer. When that number exceeds 50% your scores can plummet. Sometimes by as much as 50 points for a single occurrence.
As the credit markets continue to tighten, an old reliable source of financing for small businesses, the U.S. Small Business Administration (SBA) and its loan programs, is once again being looked at as a critical component in providing liquidity in the market. It is now imperative small business owners understand what is required of them to tap into this source of financing. The SBA lending market has changed dramatically over the past 120-180 days and the effect on lenders in this market has been dramatic as well. Several top SBA lenders have completely left the market with most others pulling back significantly. Losses and defaults are up and can no longer be offset with high interest rates (prime rate is at an historical low and capital costs are relatively high) or premiums earned on the secondary market, as there is no secondary market for SBA loans currently. This means SBA lenders are now approaching loans in a much more conservative manner and assessing risk instead of simply booking sufficient volume to stay ahead of delinquencies and defaults. This is being done on all loan applications, not just yours. There is going to be much more due diligence on the part of the lender and more hurdles for the borrower to jump. The days of 100% financing and fixed rate loans may be a thing of the past, but reasonable financing is still available to those borrowers willing to work a little harder and smarter.