Every type of credit has its advantages and disadvantages, and a Home Equity Line of Credit (HELOC) is no exception. A HELOC can impact your credit score in various ways. The way you handle a HELOC can influence your credit score just like a credit card or an auto loan would.
If you are considering a HELOC, it is important for you to understand how it interacts with your credit profile. Having an in-depth understanding of HELOC and its impact can help you maintain a strong credit score.
Here are some ways HELOC can affect your credit score.
Lower Credit Score Due to Hard Inquiries
When you apply for a HELOC, one of the first things the potential lenders will do is to perform a hard credit inquiry. It is a way for them to learn more about your creditworthiness and eligibility for a HELOC.
A hard inquiry can lower your credit score by a few points, and its effect can stay up to a year. While hard inquiries can affect your credit score, you can play smart to minimize the damage. According to the experts at Amerisave, a minimum credit score of 640 is required to meet the requirements for a HELOC.
Revolving Accounts
The terms for a HELOC can vary from one lender to another. Some lenders may report it as a revolving account or an investment loan. This can significantly affect your credit mix and payment history.
In order to avoid these issues, it is always recommended that you ask your lender the right questions. Ask them how the HELOC will be reported. In addition, you must monitor your credit report to see how it gets categorized.
Increase in Credit Utilization Ratio
There is a chance that your HELOC will be reported as a revolving account. In such circumstances, using the large value from your credit score can increase your credit utilization ratio.
In order to avoid this issue, it is always a good idea to keep your HELOC balance lower than your total credit limit. It is best to borrow only when you need and make large payments when possible.
Improvement of Your Credit Score
Your payment history is the most important factor in building a strong credit score. When relying on HELOC, making timely payments can be a great way to improve your credit score.
One of the best ways to ensure that HELOC has a positive effect on your credit score is to automate your payments. This way, you can be confident that a payment will not be overlooked.
Damage to Your Credit Score
Just like timely payments can help you improve your credit score, missed payments can damage it too. If you have missed or late payments, your credit score can take a significant hit. It can be a sign to future lenders that you may be a higher-risk borrower.
You can automate your payments or set up a modified payment plan with your lender to avoid this problem.
