Can a HELOC Affect Your Credit?

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A home equity line of credit (or HELOC) is equal parts mortgage and credit card. It is a secured loan that uses your house as collateral to open a revolving credit line with a limit set by a significant portion of your home equity.

Any roofer, kitchen remodeler, and window contractor company in San Diego will tell you that a HELOC is commonly used as a second mortgage in California. Despite its popularity, it tends to make credit-conscious homeowners nervous.

This debt can negatively impact your creditworthiness when you lack discipline and acumen to use it to maximum effect. But if you know what you are doing, though, you can use a HELOC as a tool to drive your FICO scores up steadily.

It Does Not Affect Your Credit Utilization

If you keep your credit utilization rate below 30%, borrowing money using a HELOC can keep you below the threshold. Although it is a revolving line of credit, FICO does not consider it a revolving account. As a result, the debt you acquire through it will not inflate your total credit usage, which makes up 30% of your FICO scores.

So why should you care? A HELOC can help you be a more responsible credit card user. This mortgage makes a good source of funds for larger purchases, so you do not have to pay for them with plastic. This way, you can exclusively use your credit cards to cover small monthly bills and avoid going over your total limit.

In case of emergency, a HELOC can get you covered. It lets you tap a huge amount of cash to satisfy your urgent financial needs without increasing your overall credit utilization rate.

It Helps Keep Your Credit History Age High

The beauty of taking out a HELOC is that you do not have to touch the funds. Your lender might require you to draw a minimum amount of money for the sake of collecting interest, but your account can remain open while staying dormant for years.

This feature matters because it helps increase the average age of your credit accounts just by existing. HELOC terms vary from lender to lender, but draw and repayment periods can go up to 10 and 20 years, respectively. HELOCs typically have a 25-year term, making them one of the accounts that can grow old with you and keep your credit good for decades.

It Is Easy to Manage

close shot of a person's hand using calculator in computing loan

Usually, a HELOC has a hybrid payment, which lets you avoid the principal during the draw period. You only need to pay interest on the funds you touched during the first half of the term. If you do not use any, then you do not have to pay a single penny in interest.

Interest-only payments are low, allowing you to thicken your credit file with positive items more easily. Since payment history carries the most weight in FICO score calculations, a HELOC can help you earn points consistently.

Much like other debts, HELOCs are helpful only when used properly. If you are responsible enough, this revolving line of credit can be instrumental in reaching and staying in the 800-point club.