If you are using over 40% of your available credit, paying off your credit cards with a HELOC may improve your credit score. However, there are some risks involved.
Applying and opening a HELOC will give your credit score a ding. However, you may be able to increase your score significantly by transferring your credit card debt to your home equity line of credit. How much your score will improve depends on the limit of your credit line. Lower limit HELOCs are generally recorded as revolving lines of credit when determining a borrower’s FICO score. Higher limit HELOCs are generally recorded as mortgages or installment loans.
Credit Scores for Lower Limit HELOCs
Your FICO credit score will generally improve if you use a lower percentage of your total available credit. If you transfer all of your credit card debt to a lower limit HELOC, your debt may still be counted against you in terms of utilization. However, upon opening the HELOC your total available credit will go up – followed by your credit score.
Consider this example: Prior to opening a HELOC, a consumer has $20,000 of credit card debt and $30,000 of available credit. His credit score is docked because he is using 66% of his available credit. He opens a HELOC with a credit limit of $20,000. Now, his utilization is at 40%. As his utilization drops, his credit score improves.
Credit Scores for Higher Limit HELOCs
If you pay off credit card debt with a high limit HELOC it may not be counted against you in terms of utilization at all. A HELOC that is recorded as a mortgage or installment loan should not penalize the borrower for drawing on the line. Unfortunately, there is no standard number that qualifies as a “high limit.” Borrowers have complained that some HELOCs are even reported differently on each of the three major credit bureau reports.
The Benefits of Requesting a Higher HELOC Limit
To get the best boost to your credit score, you may want to request the highest credit limit possible. If your HELOC is high enough to be reported as an installment loan, you may see a large improvement. If your HELOC is reported as a revolving line of credit, a higher limit will cause your utilization will shrink. The lower your utilization, the more your credit score will improve.
The Risks of Requesting a Higher HELOC Limit
When requesting more credit than you need, be aware that using your HELOC unnecessarily may actually harm your credit score. If your HELOC is reported as a revolving line, high utilization will lower your score. No matter how your HELOC is reported, there is the danger of getting into more debt than you’re able to pay off.
If you don’t pay back your credit card debt, your credit score may be ruined. If you don’t pay back your HELOC debt, your credit score will be ruined and you will lose your home. Because your HELOC is secured by your property, your lender has the right to foreclose if you default on the loan. Keeping these risks in mind can help you make responsible financial decisions when using your HELOC.