Opening a home equity line of credit (HELOC) will give a small ding to your credit, just like taking out any other type of loan. Your use of HELOC funds may also impact your FICO score, depending the credit limit you’ve been given.
Low Credit Limit HELOCs
If your lender gives you a low credit limit, FICO will view your HELOC as a revolving credit line similar to a credit card. In this case, utilization matters. If you have a credit card with a $5,000 limit and a HELOC with a $15,000 limit, expect your score to decrease when maxing out the HELOC line. You may notice a decrease in your credit score when using over 20% of your total available credit. You may experience a significant decrease should you use over 50%.
Fair Isaac, the creator of the FICO score, does not say what is considered a low credit limit. However, many mortgage brokers speculate that the majority HELOCs under $25,000 fall into this category.
High Limit HELOCs
If your lender gives you a high credit limit, FICO will view your HELOC as an installment loan. Your credit score may dip at the opening of the line, but should not be affected by your utilization. Your score may increase as you make regular payments. However, using 10% of the line will be the same as using 100% when it comes to utilization.
Credit Score Discrepancies
Although the information above is the general guideline, it should be noted that many consumers have experienced discrepancies. Each of the three credit bureaus (Equifax, TransUnion, and Experian) has its own version of the FICO score. Many customers have noted that their HELOCs have been reported differently on different bureau reports.
Protecting Your Credit Score
The best way to avoid FICO score decreases is to request a high credit limit. If your high limit HELOC is reported as an installment loan, you’ll be able to avoid utilization penalties. If your high limit HELOC ends up being reported as a revolving credit line, you’ll be able to avoid utilization dings by only using a small percent of your line. The risk of taking out more credit than you need is that the available money can be a temptation. But, if you’re able to have financial control, the higher limit is likely to pay off with a higher credit score.