How a HELOC Affects Your Credit Score

HELOC Can Hurt or Help Your Credit Score

Learn About Credit ScoreLet's begin by clarifying a common misconception about HELOCs (home equity lines of credit) and home equity loans. Many people view these financial instruments as essentially the same thing and similar to taking out a second mortgage, but there are several important differences between the two, especially when it comes to how your credit score is affected.

  • Home equity loans are given in one large sum with a predetermined interest rate that stays fixed for the term of the loan, like a second mortgage.

  • A home equity line of credit (HELOC) is a line of credit that homeowners may draw on whenever they need to, much like a credit card with its revolving line of credit, but with far more favorable interest rates. Also, like a credit card, a HELOC can positively or negatively affect your credit score.

When a HELOC can help your credit score

Here are a couple examples of when a HELOC can be a good idea and help you improve your credit history, credit report, and credit score:

  • Paying off high-interest credit card debt. If you have high-interest credit card balances, you can use a low-interest HELOC to pay them off quickly, save a lot of money in interest payments, and possibly improve your FICO® credit score (depending on whether your HELOC is listed as a mortgage or installment loan).

  • Short-term liquidity. If you need quick cash for an emergency of some kind, a HELOC can be a smart way to get the cash you need without taking on high-interest cash advances from credit cards, increasing your debt-to-available-credit ratio, or risking a hit on your credit score.

When a HELOC can hurt your credit score

Here are a few examples of when a HELOC can adversely affect your credit score:

  • When you have a checkered credit history. If you have a spotty credit history with missed and overdue payments, requesting a home equity line of credit and taking on additional debt will probably have a negative impact on your credit score. The credit bureaus tend to view this as taking on additional risk.

  • The "50/50 Rule." A HELOC with a line of credit that exceeds $50,000 is generally regarded as a type of second mortgage that can be helpful to your credit score, but a HELOC of less than $50,000 is usually viewed as a credit card with a large credit line. Therefore, if your HELOC is less than $50,000 and your balances exceed 30% of your total available credit, this will be detrimental to your credit score.

Borrowing money against the equity you've invested in your home is a very serious matter, because you're using your single most important asset as collateral. If, for any reason, you're unable to meet the terms of your home equity line of credit, your credit rating will suffer. You could lose your home and all the money you've invested in it. Even when conditions are favorable for using a HELOC, exercise the utmost caution when borrowing against your home.


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