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How Does HELOC Utilization Affect Your Credit?

September 3, 2021
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You might be familiar with the basics of how credit scores work. For example, the more you borrow against your credit limit, the more your credit score can drop. If you have a home equity line of credit (HELOC), that fact might make you wary of using too much of it. And you’d be wise to be cautious about how you spend money. But you can actually maintain or even increase your credit score while using a HELOC. Here’s what you need to know about HELOCs and credit.

How a HELOC Works

A HELOC is a type of revolving credit line. This means it works similarly to a credit card in that you borrow money from a credit line as you need it. As each month passes, you’re expected to make minimum payments on time, and during the draw period it is typically interest only payments. Compared to credit cards, HELOCs can usually offer a lower interest rate. This is because HELOCs are secured by the equity in a home. Another difference is that a HELOC eventually enters a repayment period. During this time, you’re no longer able to borrow money from the credit line, and you’d need to pay off what you owe.

A HELOC’s Effects on Credit

It’s true that a HELOC can affect your credit score. But whether it ends up helping, hurting, or doing little to your score depends on how you use it.

Your credit score could go down immediately after applying for a HELOC. That’s because the lender will perform a hard check on your credit, causing it to temporarily get dinged. The good news is that the drop is usually no more than five to 10 points. However, if you shop around for a HELOC at multiple lenders over the course of several months, you may experience multiple credit score drops.

Once a HELOC is open – and before you borrow from it – you may notice an improvement in your credit score. The reason why can be found in your credit utilization. A HELOC adds to your pool of total available credit, and the less of that credit you use, the better that could look to creditors. So, it’s only natural that if you borrow a large portion of your available credit from the HELOC, you could see your credit score drop as a whole. Using a smaller portion of the available credit can help prevent this drop.

Another important consideration of a HELOC is the issuing of timely payments. If you’re late on several payments or entirely miss some, then your credit score could severely drop. But if you always make timely payments on what you borrow, then you could actually improve your credit score.

Use Your HELOC Responsibly

A HELOC can be an incredibly useful tool when used responsibly. If you have questions or concerns about how to use a HELOC or how it may affect your credit, contact us. You can reach a DCU member representative by calling 800.328.8797, sending us an email, or visiting a branch.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.

**Since Earn More is a sweep feature, eligible balances are automatically swept out to interest-bearing FDIC insured deposit accounts held at participating institutions throughout the country. You will still have access to your checking account funds.