How Does an Unused Home Equity Line of Credit Affect My Credit?

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A home equity line of credit (HELOC) is essentially a revolving line of credit that a lender or bank provides you. Since it is credit, HELOCs will appear on your credit report. However, they are classified differently than consumer debt, and their use (or lack of use) can influence your credit score.

General HELOC Information

  • The HELOC works similar to a credit card in that it's a revolving fund account supported by the equity in your home or property. So if you have $100,000 of equity in your home, you could apply for a HELOC and the bank could set up the account to provide as much as $100,000 in credit. The guarantee is that if the revolving line is not paid back, then the bank or lender can force the sale of the home to get paid.

    Unlike a second mortgage, whether or not the HELOC is tapped is up to you. Individual purchases or charges within the HELOC's available balance are usually at your discretion, not the lender's.

    However, banks and lenders can shut down a HELOC at any time they feel you've become a big risk or for any other general risk the lender is facing (e.g., a bad economy with many defaults in a particular region or with a certain type of loan).

Credit Bureau Treatment of HELOCs

  • As the agencies responsible for collecting and providing credit reports on individuals, credit bureaus also include HELOCs in their reports and report scores. Since the HELOC is a revolving account with a minimum payment and credit limit, it can resemble a credit card to a credit bureau.

    However, HELOC accounts come with enough detail when reported to credit bureaus to distinguish them from the average credit card. Frequently, terminology referencing "home equity" is included in the details.

    Further, HELOCs tend to have very large available-balance figures, much higher than that of credit cards. The average large credit-card account offers approximately $25,000 in credit, while a HELOC can be $50,000 or $100,000. Large amounts over $40,000 usually get placed in the mortgage category on the report (if it's less than that amount, the HELOC may show up in the credit card category).

Credit Line Availability Versus Balance

  • The trick to influencing your credit report and score is to understand how scores are calculated. Some factors are based on history: Payment history, age of your accounts, clean processing without late payments and more all weigh in to result in a good report or a bad one. The other major factor that determines your credit score is how much credit is available versus the aggregate balanced owed. If you have a credit availability of $50,000 with 75 percent used up, that will result in a bad score. If you have $100,000 with only 10 percent used up, that will result in a good score.

Crank Up the Availability

  • Switching your debt over to a HELOC and removing your smaller accounts will definitely change the balance of your credit line availability versus the balances owed. In many cases, the HELOC size will reshape the picture of your credit report and score if you get rid of your old accounts. However, you need to make sure the balance owed on your HELOC doesn't start creeping over 10 percent of your total credit line. If it does, the credit score on your report will start to drop.

Risks With Relying Only on HELOCs

  • HELOCs can be closed with little or no notice by lenders. This can create a sudden problem for those who rely on HELOCs for ongoing financing. Many lenders will close lines if they feel that the home the line is based on has dropped enough in equity to make the line an unsupportable risk in default.

References

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