A home equity line of credit (HELOC) can impact your credit score. If you already have lines of credit such as credit cards, adding another line can affect your score. It is important to use the home equity line of credit properly to prevent a drop in your credit score.
Poor Credit Utilization
A home equity line of credit can appear like a credit card on your credit report. If you spend the entire amount of the credit line, it looks like a large amount of utilized credit on your report. Credit utilization is the amount of used credit compared to the total amount of available credit. A high balance will significantly lower your credit score.
Good Credit Utilization
When used properly, the home equity line can improve your credit. Since home equity lines of credit appear like credit cards on a credit report, use it to your advantage. Obtain the highest amount of credit you are approved for to boost your total amount of available credit. Use only what you need and it will show a lower balance-to-limit ratio.
Tips
A home equity line of credit should only be taken if you can make the payment commitment. The line of credit is linked to your home. If you are unable to repay the line of credit, you are jeopardizing your credit and your home. Borrow only what you can comfortably afford.
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