A Home Equity Line Of Credit (HELOC) is a personal line of credit that uses your house as collateral. For example, if you get approved for a $100k HELOC, you will be able to withdraw any amount you want at any time up to $100k and pay it back at your pace. The benefit of a HELOC is that it provides the flexibility of withdrawing money against your house whenever needed. Interestingly, you only pay interest on the money you actually use until it gets paid back.

Many people consider a HELOC a great option for quick access to funds in case of emergencies. Once set up and approved, it remains available whenever you need it, without any interest charges unless you utilize it.

Impact of HELOC on Credit Score

Just like with other forms of credit, the way you manage your HELOC can affect your credit score. Typically, maxing out a credit card or any other revolving loan can significantly hurt your credit score. Since a HELOC is considered a revolving loan—where you can borrow varying amounts and the minimum payments adjust based on the amount borrowed—maxing out a HELOC could potentially have a significant impact on your credit score.

FICO's Stance on HELOC

However, it’s important to note that even if a HELOC appears on your credit report as a revolving loan, FICO confirms that HELOCs do not affect your credit utilization. This is largely because a HELOC uses your home as collateral, distinguishing it from other types of revolving credit.

Exceptions and Clarifications

According to a statement from FICO, while HELOCs are generally excluded from credit utilization calculations, this isn't always the case. The exclusion typically applies under the newer FICO scoring models, whereas the older models might still consider HELOC balances, especially for amounts under $50k. Above this threshold, the balance might start being excluded—though the exact cut-off isn’t clear and seems to vary.

Relevance of Older Scoring Models

It's easy to disregard older FICO models as outdated; however, they still play a critical role in mortgage lending. Most mortgage loans still utilize the older scoring models, which means a HELOC could unexpectedly affect your credit score when you apply for a mortgage.

What to Do If Your HELOC Affects Your Credit Score

If you find that your HELOC is negatively impacting your score during a mortgage application, you have a couple of options:

1. Pay it down: Reducing the balance can help mitigate the impact on your credit score.
2. Increase the balance above $50k: If applicable, drawing more to surpass the approximate threshold may help exclude it from credit score calculations under certain FICO models.

Conclusion

Understanding how a HELOC impacts your credit is crucial, especially if you're considering future real estate transactions. Always keep informed about the specific terms of your credit agreement and stay updated on how different credit scoring models may view your HELOC.