When you take out a home equity line of credit -- sometimes known as a HELOC -- you must consider lots of factors carefully. Make sure you’ll be able to meet your monthly payment responsibilities comfortably. Use the money wisely for projects that will enhance your home or benefit your life financially. You also need to consider the impact on your credit report and history.
A home equity line of credit, just like any other form of lending, does show up on your credit report. It can be treated in two different ways. If the limit on your HELOC is relatively low, it will be treated as a revolving line of credit, similar to a credit card. It will be subject to the same treatment as a credit card on your score. If you max it out, or even approach the limit, that will ding your score.
However, if your HELOC is for a larger amount, it will be treated by the credit agencies as an installment loan, similar to a mortgage or car payment. The actual amount needed to trigger this treatment is regarded as proprietary by the credit scoring companies, and they do not reveal the figure. If yours is regarded as an installment loan, you will not be penalized in the same way if you run your line up to near its maximum.
You risk damaging your credit score if you miss any payments on your line of credit, regardless of how it is treated by the credit agencies. Any missed payments will be reported by your lender, and your credit score will suffer. The effect gets larger the longer you miss out on regular payments. Being 30 days late may not have a lasting effect if you get back on track quickly, but if you are as much as 90 days late, you will find that your score drops quickly and is harder to repair.
Just as your HELOC will show up on your credit report, so you credit report and score can affect the rate of interest you pay on your HELOC. The higher your FICO score, the lower rate of interest the bank will offer you on your line of credit. Before you take out the credit line, check your score and if it’s not where you want it to be, take a few months to concentrate on improving your credit habits before you sign the new credit commitment.