Your Credit Score and a HELOC

How is my credit score affected by the amount of credit I have available to use?

I have been approved for a 400,000 dollar home equity line of credit (kitchen remodel). However, I only need about 100,000 dollars, and I plan to pay that off to zero by the end of the teaser rate (9 months). My question is how is my credit score affected by the amount of credit I have available to use? Will my credit score go up or down by having a zero balance on a $400,000 HELOC vs a zero balance on a $150,000 HELOC? I plan on keeping a zero balance for many years.

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Bill's Answer
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Having an excess of credit available from your HELOC will not have a major effect on your credit score. If you go to MyFICO.com you will get information directly from Fair Isaac, Co., the creator and owner of FICO scoring, the most widely used credit scoring model in the United States. The manner in which you handle your unsecured credit, mostly credit cards and unsecured consumer loans is the primary factor that determines your credit score. The minor effect of secured debt, such as the HELOC you are contemplating, only impacts your score as it "rounds out" your credit profile into a normal mix of secured and unsecured debt.

One very important factor affecting your score is the ratio of your available credit to the credit that you have used. If you add up the credit limits on all credit card accounts then compare the aggregated balances (credit used) of the same accounts, the ratio will be a major determinant of your score. For example, if you have aggregate credit lines of $2,000 and have charged up $1,000 your credit available to credit used is 50%, a ratio that is not favorable for a good credit score. Ideally, this ratio should be around 30%. You might deduce that the credit line of your HELOC would naturally increase your unused credit and make your ratio very appealing. Not so, because the HELOC is a different type or classification of credit, secured credit, and FICO does not mix credit types to get the resultant ratio. So, the HELOC available credit does not materially increase your credit score.

You only mentioned the single kitchen project as the object of the HELOC proceeds, so I suggest you go with the $150,000 credit limit. To have a limit that is clear to you to be excessive is a bad idea, and you may have to pay points or even a commitment fee on the unused portion. Also, over time, you may be tempted to use the line-of-credit for financially questionable purchases and investments, which you would not have considered were it not for the ever-available credit line, that you didn't need to start with. Keep in mind that any purchases on this line-of-credit are secured by your home, which could cause a problem should an unforeseeable financial difficulties arise in the future.

You mention in your question that you plan to pay off the balance of your HELOC during the first nine months of the loan. Many HELOC agreements include a pre-payment penalty if the loan is paid off before the end of the "draw" period, or the period during which you can use the line of credit. For most HELOCs, the draw period is between five and ten years. If you plan to pay of the balance of the loan within the first nine months, make sure that you choose a loan that will not penalize you for your early payment.

To find more information about home equity lines of credit, I encourage you to visit the Bills.com Home Equity Resources page.

If you enter your contact information in the Bills.com Savings Center at the top of the page, we can have several pre-screened lenders contact you to discuss the options available to you.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

7 Comments

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  • 35x35
    Jan, 2012
    joe
    I have a low to mid 600s credit score and i am looking for a home equity line of credit to invest into a business opportunity. I own a home with a value of about 200,000 and it is paid off and went to my local bank and was denied due to my credit score. I have been looking for companies online that would approve me with a low credit score and dont know who to go with. Any info please leave thanks
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      You are correct that in today's market, lenders are tightening their underwriting requirements. You can try by getting a Bills.com Quick Quote. However, before you even decide to take out a loan to invest in a business opportunity, consider the consequences of the business opportunity not potentially losing the house in foreclosure.
      0 Votes

  • 35x35
    Jan, 2012
    Greg
    I have a 655 Fico Credit Score on Experian. I have $50,000 in credit of which $20,000 of it is a HELOC. I have 5 credit cards with $0 balances and no late payments in 2 years along with 2 collection as accounts that are +4 years old. I also have a car loan ($21,000) with no late payments. Right now, of the $50,000 of available credit, $20,000 is being used from this HELOC. One other note, I do have 14+ inquires in the past 3 months as I have applied for credit. My scores have always been in the mid to low 600's. My question is, if I pay off the HELOC and the Car Loan in full in the next few months what impact will that have on my score? Also, if I pay of the HELOC, should I close the account, keep it open for a while or just leave it alone? I do not plan on ever borrowing against it again. I just want my scores to improve and not sure what to do with the HELOC after its paid off.
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      I don't think you will get a big boost, if any at all, by paying your HELOC and car loan debts in full, as opposed to paying them in a timely manner each month. Paying off your collection accounts could actually harm your credit score in the short term, by making those negative accounts show recent activity.

      If you pay down the HELOC, you don't need to close it, as keeping the account open helps your score.

      It is not clear to me why your score is not rising, given the fact that it has been two years since your last derogatory mark. I wonder if it has anything to do with the approximately $9,000 in debt that you did not specify. You are wise to keep the number of inquiries to a minimum. Keep in mind that while all inquiries show on your report, ones that are made within a two week for the same product count as only one inquiry against your score.
      0 Votes

  • 35x35
    Mar, 2008
    brad
    You really have two choices here (if you decide that the Home Equity Loan is what you need): 1. rehabilitate your credit, or 2. have your husband apply alone. To rehab your credit, you should see if you have send a letter or make payments to your lenders with explanations of your sickness and see if they will remove the negative marks on your credit report. Alternatively, your husband can attempt to apply alone for the heloc loan and see if the lender will only look at his credit rating (but that won't let you include any of your income in the DTI calculation). Good luck.
    0 Votes

  • 35x35
    Mar, 2008
    Karen
    I applied for a home equity loan however my credit score is low, my husbands however is great, therefore we are getting turned down. Our credit is good. I had 2 lateness on 2 accounts with in the last year a oversite on my part due to sickness. . We really could use the home equity loan. Any suggestions on what we should do?
    0 Votes

    • 35x35
      Feb, 2011
      Alina
      Get the house loan in just your husband's name using his income. My husband and i did that 5 years ago using my credit and income.
      1 Votes