A Home Equity Line Of Credit (HELOC) is a personal line of credit that uses your house as a collateral.
For example, if you get approved for a $100k HELOC then you will be able to choose to withdraw any amount you want at any time up to $100k and pay it back slowly. The benefit of a HELOC is that it allows you to have the flexibility of withdrawing money against your house at any time needed. But you only pay interest on the money you actually use and only until it gets paid back.
Many people enjoy a HELOC as a great option to have access to money quickly in case of a rainy day. You set it up once and then once approved, you have it available for whenever you need (and as pointed out above, you do not pay any interest only if you use it).
Does using a HELOC affect your credit score?
As we already discussed many times, maxing out a credit card or any other revolving loan hurts your credit score significantly. Technically, a HELOC is considered a revolving loan because you can borrow any amount you choose and your minimum payments will adjust based on the amount borrowed. So maxing out a HELOC should be having a significant affect on your credit score, just like when maxing out a credit card. But continue to read, please.
FICO confirms that HELOCs don't affect your credit
But even if a HELOC is listed on your credit report as a revolving loan, FICO confirms that HELOC does not affect your credit utilization. This is due to the fact that HELOC uses your home as a collateral which makes it different from most other revolving loans.
Not so fast
In the FICO article linked above, they state that FICO generally excludes HELOC from credit utilization calculations.
But please do not miss the word “generally”.
Yes. There are times when HELOCs do not get excluded.
So when yes and when not?
In truth, only the newer FICO scoring models completely exclude HELOCs from credit utilization calculations. The older models don’t.
How do the older models work?
With the older FICO scoring models, a HELOC will depend on the loan amount. Any loan under $50k will not be excluded. From about $50k and higher, the loan will start being excluded. To be clear, I’m not sure of the exact dollar amount but with my limited experience it seems to be in the range of $50k.
Who cares about the older models?
You may think that caring about the old FICO models is pretty much the same as caring about last year’s snow. But in fact, it’s not so simple because the old Fico models have not yet completely melted away. They are still used for almost every single mortgage loan you will apply for.
So when applying for a mortgage, be careful with your HELOC as it can hurt your credit score significantly without you even realizing.
What should you do if your HELOC affects your score?
In a case where you are applying for a mortgage and your HELOC is hurting your score then you have one of these two options:
- Pay it up
- Draw more money to get the loan above $50k (as pointed out above, that is the approximate cut-off to stop it from affecting your score)
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