Credit Scores & a HELOC: What You Need to Know

Anyone who is looking seriously at a home equity line of credit (HELOC) has probably already learned about the benefits of this kind of flexible financing option for major projects. 

However, lots of people still find themselves asking: what role is my credit score going to play in the HELOC process?

HELOC Basics

For readers who are new to the idea of a HELOC, here are a few things you should know:

• A HELOC is not a loan, but rather a line of credit that you can draw from as needed.
• You can use your HELOC funds for anything, but they are usually used for major projects. 
• The amount of your HELOC is based on the equity you have in your home and its appraised value. 
• HELOCs tend to have a lower interest rate than other lending options, especially credit cards or store financing accounts. 

Does your credit score matter when applying for a HELOC?

Your credit score affects almost everything in the banking, borrowing, and lending world. 

A good credit score can save you money when you go to buy a house or a car, or to finance any major purchase. But what about a HELOC? How does your credit score affect getting a home equity line of credit?

Your credit score impacts your HELOC eligibility.

The first step to getting a HELOC is to apply with a lender. Borrowers typically need a credit score of at least 680 in order to be approved. Having a score of 700 or higher improves the likelihood of being approved.

If you’re not at that level, you may want to focus on improving your credit score before you apply. 

Your credit score also impacts your HELOC interest rate.

The better your credit score, the better your interest rate is going to be.

HELOC rates can range from anywhere from about 3% to 21%. That’s a pretty big range! A good credit score will get you closer to the average HELOC interest rate of 6.07%.

How does getting a HELOC impact your credit score?

This is another important question to consider. Will getting a HELOC impact your credit score negatively or positively? Or will the impact be neutral? 

The answer, of course, depends on your specific credit history and financial situation. 

When you apply for a HELOC, the lender will almost certainly do a credit check as a hard inquiry,  and the inquiry will stay on your credit report for about two years. This is true regardless of whether you end up being approved for the HELOC, or whether or not you end up finalizing the deal. 

Here is some good news, though: a HELOC is NOT treated as a credit card by the major credit scoring companies, though both are considered “revolving” credit lines, unlike credit card accounts, HELOCs are not included when credit scoring models calculate your revolving credit utilization ratio. That means that you aren’t suddenly adding thousands of dollars to your existing debt-to-income ratio. 

Improving Your Credit Score

You can improve your credit score through consistent effort over time. It’s not a fast process, but it can be done! Check out our advice on getting your credit score on track. You can start correcting errors on your credit report, building good credit, paying down debt, and avoiding additional debt, starting today. 

Check out our free eGuide!

We’ve put together a free, downloadable eGuide, “Understanding & Using a HELOC to Finance Your Next Big Project.” Be sure to download your copy today so that you can learn more about how a HELOC works and how you can use one to fund your next major project, whether that is home improvement, major repairs, or even your education. 

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