Yes,Â home equity lines of credit (HELOC) can have an impact on your credit score. Whether that impact to your credit score is negative or positive depends on how you manage your HELOC. It also depends on your overall financial situation and ability to make timelyÂ payments on any amount you borrow via yourÂ homeÂ equity line of credit. Find out more aboutÂ how a HELOC affects a credit score.
Find Your Loan Today
What IsÂ a HELOC?
HELOC stands forÂ homeÂ equity line of credit. If you haveÂ equity in your home, you can use it to take out a line of credit up to that value. Whether or not you’re approved forÂ a HELOC depends on your credit history. However,Â a HELOC is not a secondÂ mortgage.
Unlike aÂ mortgage, you can take outÂ money from your HELOC as you need itâusing only the amount you needâand paying yourÂ loan back in a revolving manner or inÂ monthly payments. It works a lot like aÂ credit card but with a larger availableÂ credit limit. For example, if you have $40,000 inÂ equity and get approved forÂ a HELOC for the total amount, you can take out up to that much in funds.
You might take out $10,000 to put siding on your house and begin paying back that amount according to your lending agreement. Later, you might want to cover some of your child’s college tuition, using another $5,000 of the HELOC. You continuouslyÂ payback what you borrowed on theÂ equity line unless you have paid back all of the balance.
It’s important to note thatÂ a HELOC is credit that is extended based on your home’s value. That means if you default on yourÂ homeÂ equity line of creditâyou take outÂ money and never make the requiredÂ paymentsâyou could eventually be dealing with a foreclosureÂ situation.
How isÂ a HELOC Different from aÂ Home Equity Loan?
HELOCs andÂ home equity loans do share some similarities. In both cases, you’ll be taking out aÂ loan from yourÂ homeÂ equity. But while yourÂ home equity loan will give you theÂ money all at once,Â a HELOC gives you a set amount ofÂ money, as you need it, that you can borrow andÂ payback.
Home equity loans are similar to any otherÂ loanâanÂ equity loan you take out will have aÂ fixed interest rate,Â lump sum, etc. On the other hand,Â home equity lines of credit do have an interest rate, but they’re typically lower and only applied to the amount ofÂ money you take out.
Is aÂ HomeÂ Equity Line of Credit a Good Idea?
Whether or not any type of credit is a good idea depends on your personal financial situation. If you’re drowning inÂ debt and using yourÂ homeÂ equity toÂ pay the bills, you’re just swapping one type of financial issue for another. But if you’re using your HELOCÂ toÂ payoff high-interestÂ credit card debt so you only have a single, lower-interestÂ debt to worry about, this might be a smart move.
Only you can decide if aÂ homeÂ equity line of credit is a good idea for you. However, if you have a poor credit scoreÂ or other negative factors, you may not get approved forÂ a HELOC. Or, the HELOC may come with unfavorable terms that make it too expensive to use as a form of credit. You may want to work on fixing your creditÂ before applying forÂ homeÂ equity lending.
How Does a HELOC Affect a Credit Score?
Any type of credit you use can impact your credit score. When you take outÂ a HELOC, you extend how much available credit you have. If you open the line and don’t use any of the credit, your credit utilization rateÂ will be improved, which could also potentially improve your credit score. And if you make timelyÂ payments on credit you borrow from thisÂ equity line, those are positives that can be reported on your credit history.
On the other hand, if you take out a large portion of yourÂ equity line, you have a higher credit utilization rate, which can hurt your score. Failing to make timelyÂ payments could also potentially drop your score. SinceÂ HELOC rates can be variable, you must plan for fluctuating payment requirements to avoid this issue.
Do UnusedÂ Credit Lines Hurt Your Credit Score?
UnusedÂ lines of credit typically improve your utilization rate, which would improve your credit score. However, HELOCs are a type ofÂ revolving credit, just like aÂ credit card.
If you have a huge amount of unused credit, some lenders might see you as a potential riskâespecially if you don’t have the income to back up this credit. This is because you could suddenly take out a large amount on thisÂ equity line without the income toÂ pay it back, putting your other debts at risk too.
What Are the Benefits ofÂ a HELOC?
Just like any otherÂ loan, there areÂ pros and cons to taking outÂ a HELOC. The benefits of aÂ homeÂ equity line of credit include the ability to get a large amount of credit based on your home’s value and flexible options for managing that credit. You can use it as you need it, which gives you more control over what type ofÂ payments you need to make at any given time.
What Are the Disadvantages of aÂ HomeÂ Equity Line of Credit?
The biggest disadvantage ofÂ a HELOC is that it’s tied to your home, which means there’s a slight risk of foreclosure or a home lien if you don’t make yourÂ payments. TheÂ payments may also work on a variable interest, which means this isn’t always the most affordable credit option for homeowners.
It can also look like a largeÂ credit card account on your report, so if you only need a small amount of credit on a short-term basis, you might want to consider personalÂ loan optionsÂ instead.
The post How Does a HELOC Affect a Credit Score? appeared first on Credit.com.