heloc: Myth buster: Does a HELOC impact my credit scores like a credit card?

Earlier this week we discussed home equity, how it’s determined, and how much of it has evaporated over the past two years. Today we’re going to stay on the topic of home equity but we’re going to focus specifically on its impact on your credit scores, specifically your FICO® credit scores.

A HELOC, or home equity line of credit, is a revolving account issued by a bank or credit union. It is secured by the equity of your home. For example, if I have $20,000 of equity in my home, I may be able to open a line of credit at a bank for that amount. I can draw against it just like I draw against a credit card: small amounts, a large amount, all of it, or none of it. At the end of the month I get a bill for a minimum payment amount and the account history is reported to the credit bureaus. All told, it’s not an atypical account in the grand scheme of credit reporting. The one unique aspect of a HELOC is that, as reported to a credit bureau, it can look exactly like a credit card account. They are both revolving accounts, have minimum payment requirements, remain open even with a zero balance, have a credit limit, can have greatly different balances from one month to the next, and are issued by a bank or credit union.

The question consumers often ask is that since it does look so similar to a credit card, does the HELOC have the same impact on their credit scores as a credit card? The concern is that many people use their HELOC to pay for very expensive purchases such as home improvement or to pay off large credit card balances. And because consumers are becoming more familiar with what and how certain credit items impact their scores, they are concerned that having a HELOC with a large balance might cause their scores to drop similar to how a credit card with a high balance might do the same thing.

The good news is that, for the most part, consumers have nothing to worry about. The majority of time a HELOC is reported to the credit bureaus it is also accompanied by descriptive text, called a narrative code, which explains the nature of the account. For example, it is common to see the text “Home Equity Line” or “Secured by Home Equity” on a credit report along with a HELOC account. This text is picked up by smart credit scoring models and causes it to exclude the HELOC when determining credit card debt-related measurements of your credit reports.

There is also logic that will use the limit of the account to make an educated assumption about the nature of the revolving account. For example, a revolving account with a $90,000 limit is much more likely to be a HELOC than a credit card. So, despite the fact that they look very similar, smart scoring models will not be fooled. If you have a HELOC, you should review your credit report to ensure that it has some sort of descriptive text, which is reported to the bureaus along with the account by your lender. If it is missing, you should contact your lender and ask that the HELOC be added to the account.

So, the answer to the question in the title of the article is no. HELOCs and credit cards typically affect credit scores differently, assuming the credit-scoring model distinguishes between the two. If it does, and the smart ones do, a HELOC will not count against you as additional credit card debt.

If a HELOC may give your finances a break and allow you some breathing room, consider it knowing that your credit scores will probably not be affected – assuming you pay the monthly balance on time and do not become delinquent. The main reason to carefully consider a HELOC is that you place your home in jeopardy if you can no longer pay what you owe.


Source: credit.com