Home equity lines of credit (HELOC) offer a revolving line of credit based on your home value that may have a positive -- or negative -- affect on your credit score. Although lenders report HELOC loans to credit rating agencies, whether this will have any appreciable impact on your score depends on the size of the loan and how you use it.
Identification
HELOC loans usually appear on your credit report as a revolving line of credit because they work like a credit card, according to Money Crashers. If approved for a HELOC, you can use the funds for anything you need, such as home repair. Once you repay the principal, you have that credit available to you again.
Function
When your HELOC loan has a principal balance over $50,000, the FICO scoring formula counts it as an installment loan, like your mortgage. Below this limit, the FICO model treats a HELOC as a revolving line of credit. A HELOC will affect your credit score in both situations, but it has greater impact as a revolving line, according to BankRate. Lenders often add a tag line of "home equity line" to avoid confusion.
Effects
On-time payments of your HELOC improve your credit score. If the HELOC appears as a revolving loan, it can have a more serious impact. The FICO model gives 30 percent weight to how much of your credit you utilize. Maxing out your HELOC loan will likely bring your credit utilization ratio over the suggested maximum of 35 percent.
Tip
If you want to avoid a HELOC from appearing as a credit card on your credit report, MoneyCrashers.com suggests looking for a home equity installment loan (HEIL). You might consider getting the largest HELOC possible to reduce the chances of coming close to maxing out the account, but this could entice you to spend more and put your home in danger.
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