HELOCs and Credit Scores: What You Need to Know
How does a home equity line of credit affect your credit score
A home equity line of credit, otherwise known as a HELOC, is a revolving line of credit that’s secured by the equity in your home. While you might know that HELOCs can be a good way to pay off recurring expenses without taking on high-interest credit card debt, you might not know that they can also affect your credit score. Here’s what you need to know about HELOCs and credit scores.
HELOCs vs. Credit Cards: How They Impact Your Score
In many ways, a home equity line of credit is similar to a credit card. You can make purchases with it, you have a balance, and will need to make minimum payments each month. Despite that, HELOCs and credit cards are treated by the credit bureaus somewhat differently when it comes to your credit score. In particular, when they look at your credit card debt, they examine how much you charge each month and compare it to how much credit you’re allowed -- which is called your utilization rate.
Fortunately for you (if you have or want a HELOC), credit bureaus won’t usually look at your utilization rate for a home equity line of credit. Instead, they’ll simply look to make sure that you’re making the minimum payment each month. Paying more on your HELOC, or paying multiple times a month, won’t typically improve your credit score.
Despite that, calculation methods still vary, so if you do have a HELOC with a high utilization rate, some credit bureaus could still count it against you. For that reason, some experts suggest keeping your rate of HELOC credit use somewhat low. For example, on a $50,000 HELOC, having a high balance of $5,000 may be ideal.
Using HELOCs to Pay Off Credit Card Debt
If you have a HELOC (or want to get one) and also have a lot of credit card debt, you may consider using the HELOC to pay off or pay down some of your cards. That way, you can reduce the utilization rate on your credit cards, which is more likely to be counted against you than the utilization rate on your HELOC.
No matter what, it’s still important to be cautious with HELOCs since they can often be closed by your lender with little or no notice. In fact, your lender could decide to close your HELOC due to market factors that have nothing to do with you personally, such as a large number of similar individuals in your area failing to make payments. If you’re not careful, that could leave you in a sticky financial situation.