A home equity line of credit (HELOC) can provide you with money that you can use for home repairs, credit card bills or another purpose. A HELOC generally has a lower interest rate than a credit card.
If you take out a HELOC, you will be able to access a percentage of your home equity as a line of credit and use as much of it as you need during a period of time called a draw period. During the draw period, you’ll have to make monthly payments for interest. You can also pay back a portion of the principal if you choose.
Once the draw period is over, you’ll have to pay back the principal and interest, and you won’t be able to make any new draws during the repayment period.
How a HELOC May Affect Your Credit Score
When you apply for a home equity line of credit, or any line of credit, the company will perform a hard inquiry to check your credit and decide whether to approve your application and how much credit to give you. A hard inquiry may temporarily lower your credit scores by a few points.
Making timely payments on a home equity line of credit can help your credit scores. If you fall behind on your payments, however, your credit may suffer. If you decide to use a HELOC, be careful not to use more of the credit line than you’ll be able to repay. Plan ahead for the time when your interest-only payments will end and make extra principal payments early if you can.
A home equity line of credit has a variable interest rate. If your interest rate rises and you can’t keep up with your monthly payments, your credit scores can fall. You may also wind up facing the threat of foreclosure.
A HELOC will be listed on your credit report like any other revolving account, but credit reporting agencies won’t count the balance on a home equity line of credit when calculating your credit utilization ratio. If you use a HELOC to pay off high credit card balances, you’ll lower your credit utilization ratio, which can give your credit scores a boost.
Should You Take out a Home Equity Line of Credit?
Like any financial tool, a HELOC has pros and cons, and it’s not right for every person or every situation. Using a home equity line of credit to make home improvements or pay off credit cards can increase the value of your home and help you lower your interest rates.
If you can’t afford the monthly payments, or if you pay off your credit card balances with a HELOC, then make additional charges that put you into more debt, your credit scores can suffer. Think carefully about your financial situation and goals and figure out if a home equity line of credit is the best option for you.