A home-equity line of credit, or HELOC, is a type of lending arrangement in which you can access the equity in your house at your disposal. Many people use this type of credit as an alternative to a credit card. While it can come in handy, you should consider the impact this type of credit can have on your credit score, which is also known as your FICO score.
Credit Utilization Ratio
When calculating your credit score, the credit bureaus look at your credit utilization ratio. This is a ratio that compares the amount of balances you have on revolving credit lines in relation to the available credit. While a HELOC is similar to a credit card, the amount you do not use typically is not added to the available credit for you in this calculation. This means that, in this regard, it may not help you to have a home-equity line of credit open.
Credit Mix
Another factor to consider is your credit mix on your credit report. Having several different types of credit, such as revolving credit lines and installment loans, boosts your score. A home-equity line of credit generally is regarded as an installment loan, and if you do not have any other loans of this type, it may increase your score.
Payment History
When you open a home-equity line of credit and borrow money, you eventually have to start making payments to pay off the balance. If you make your payments on time, the home-equity line of credit lender reports this as a positive on your credit report. If you skip payments or make late payments, this hurts your credit score. The most important factor when calculating your credit score is your payment history, so a HELOC can significantly affect your score in this regard.
Size of the Line
Depending on the credit bureau, your home-equity line of credit may be listed as a revolving line of credit or as an installment loan. If you have a small home-equity line of credit, the credit bureaus may regard it as a revolving line of credit such as a credit card. If you have a large loan balance similar to a home-equity loan, then it is regarded as an installment loan. You can get a copy of your credit report from the three major credit bureaus to see how your home-equity line of credit is regarded.
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