How does a HELOC affect credit scores?

[jamie123]

I've been offered what I think is a great deal on a HELOC from my bank.

The terms:

• 0.99% introductory Annual Percentage Rate (APR) for the first 6 billing cycles.
• After the introductory APR ends, the APR will be a variable rate of Prime + 0.50%† (an APR of 5.75% as of August 7, 2019) when you have payments on your credit line automatically made from your checking account.

I have a number of home improvements that I was planning to do this fall that total about $30K. I was planning on just paying cash for them but in order to do that I would need to cash in some stocks. My stocks have been doing really well and if, a big if, they continue to do well would far and away beat the 5.75% APR of the HELOC.

I was thinking that I should take out a HELOC and I could cash in some stocks every month to make the payments while keeping my stock investments growing in the market. The future growth in the stocks could hopefully pay for a great portion of my home improvements that the HELOC was used for.

Now I know what you are thinking..."This guy is borrowing money on his stocks and he will be in trouble if the market crashes!"

But that really isn't the case. I have plenty of investments to cover the $30K if the market crashes.

My rational is to use my good credit scores to get this low APR loan so that I can use my investments to maybe make more money to pay off these home improvements. I do however have a few questions about HELOCs.

• I think that I remember reading here that there is a threshold in dollar value where a HELOC is treated like a credit card on reports? Is that true? I want to ensure that this reports as a HELOC to help my scores. What do I need to do?
• What will the HELOC do to my scores once it reports? Can I expect my scores to drop as much as if I added a new CC?

I appreciate all your insights in this matter.

[iv]

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@jamie123 wrote:

I've been offered what I think is a great deal on a HELOC from my bank.

The terms:

• 0.99% introductory Annual Percentage Rate (APR) for the first 6 billing cycles.
• After the introductory APR ends, the APR will be a variable rate of Prime + 0.50%† (an APR of 5.75% as of August 7, 2019) when you have payments on your credit line automatically made from your checking account.

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How good that deal is depends on how quickly you plan to pay it off... I've been seeing Prime - 0.125% down to Prime - 0.375% recently (but without an intro 6-month teaser rate).

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@jamie123 wrote:

I have a number of home improvements that I was planning to do this fall that total about $30K. I was planning on just paying cash for them but in order to do that I would need to cash in some stocks. My stocks have been doing really well and if, a big if, they continue to do well would far and away beat the 5.75% APR of the HELOC.

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Excellent choice.

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@jamie123 wrote:

• I think that I remember reading here that there is a threshold in dollar value where a HELOC is treated like a credit card on reports? Is that true? I want to ensure that this reports as a HELOC to help my scores. What do I need to do?

---

This only appears to affect OLD score models, not FICO 8 or 9.  But the "mortage" score versions (EQ5/TU4/EX2) may consider a "small" HELOC (under either $35k or $50k) as a credit card.

This issue historically was a HELOC could report just as a "Revolving" tradeline, without clear indication that it was real estate-backed, so older models may have used the limit as an indicator of card vs HELOC.  Although HELOCs do still tend to confuse many CMS displays, I haven't seen recent HELOCs appear just as a revolving line.  Transunion actually displays my two most recent HELOCs as "Mortgage" lines, Equifax as "Line of Credit", and Experian as "Line of Credit" (but with "Terms: Revolving").

That said, I've only every opened HELOCs in the 100k-200k range, so I can't directly share experience with a 30k line.

Remember, a HELOC doesn't require you to draw the whole line amount - assuming you have the equity in the house, you can open a larger (100k+) line, frequently get a better APR, immediately show great utilization %, avoid any possible old-FICO-version negative effects, and still only be paying interest on the 30k you actually drew.

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@jamie123 wrote:

• What will the HELOC do to my scores once it reports? Can I expect my scores to drop as much as if I added a new CC?

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Minimal effect.

I saw a 2-6 point drop on FICO 8 right after reporting a 100k HELOC with 50% utilization (and recovered to 850 on Experian the following month).  All three FICO 9s actually jumped UP to 850 (for the first time!) immediately after it reported, and have stayed there since.  FICO 5/4/2 were mixed (and bounced around frequently in the following months), but generally, TU4 moved up, EQ5 and EX2 moved down, but not by any meaningful amount.

That is with an old, thick, and otherwise "perfect" set of reports... YMMV.

[SouthJamaica]

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@jamie123 wrote:

I've been offered what I think is a great deal on a HELOC from my bank.

The terms:

• 0.99% introductory Annual Percentage Rate (APR) for the first 6 billing cycles.
• After the introductory APR ends, the APR will be a variable rate of Prime + 0.50%† (an APR of 5.75% as of August 7, 2019) when you have payments on your credit line automatically made from your checking account.

I have a number of home improvements that I was planning to do this fall that total about $30K. I was planning on just paying cash for them but in order to do that I would need to cash in some stocks. My stocks have been doing really well and if, a big if, they continue to do well would far and away beat the 5.75% APR of the HELOC.

I was thinking that I should take out a HELOC and I could cash in some stocks every month to make the payments while keeping my stock investments growing in the market. The future growth in the stocks could hopefully pay for a great portion of my home improvements that the HELOC was used for.

Now I know what you are thinking..."This guy is borrowing money on his stocks and he will be in trouble if the market crashes!"

But that really isn't the case. I have plenty of investments to cover the $30K if the market crashes.

My rational is to use my good credit scores to get this low APR loan so that I can use my investments to maybe make more money to pay off these home improvements. I do however have a few questions about HELOCs.

• I think that I remember reading here that there is a threshold in dollar value where a HELOC is treated like a credit card on reports? Is that true? I want to ensure that this reports as a HELOC to help my scores. What do I need to do?
• What will the HELOC do to my scores once it reports? Can I expect my scores to drop as much as if I added a new CC?

I appreciate all your insights in this matter.

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I don't think it will help your scores at all. There's a hard pull, there's a reset of your age of youngest account, there's a lowering of your average age of accounts, and there's a big unpaid balance. So doing it for FICO score purposes is a mistake.

Nor do I think it will help your finances. IMHO thinking you can make out better than the bank is a mistake. They're collecting 5.75% on a secured loan, which they're guaranteed to recoup.

[jamie123]

Thanks for the information iv!

I think I will take out a HELOC for $75K. I have more than enough equity in the house so that should work out.

I'm not looking for this to improve my credit score in the short term but if it reports as a HELOC it should help my scores a few years down the road. I just want to make sure that my scores don't take too big a hit right now and use the bank's money to allow my investments to rise in value in the meantime. (It's like getting a discount on my home improvements IMHO.)

And yes SouthJamaica, I do realize that there is some risk to this but I have the money to pay cash at any point if the markets tank. Besides, I have a job and get a salary. I'm sure most people that get HELOCs have only their salaries to guarantee the loan repayment.

This is how I use my good credit scores to help me make more money. I've done the same thing in the past with credit cards and it worked out well. I've used long term 0% APR offers of 12 to 18 months and then use those cards for home furnishings and such and then pay them down to $0 a month or two before the 0% offer expires. The only problem with using CCs this way is the HUGE hit my scores take while I am carrying large balances month to month.

[IPIF]

some lenders have fine print that requires the borrower to reimburse the lender for closing costs and/or pay an early closure fee  if the HELOC is paid off too soon after the credit line is created. 

[iv]

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@jamie123 wrote:

I think I will take out a HELOC for $75K. I have more than enough equity in the house so that should work out.

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Check where the rate breakpoints are, based on line limits...  You might see an additional discount at 100k. (Depends on the lender.)

[iv]

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@IPIF wrote:

some lenders have fine print that requires the borrower to reimburse the lender for closing costs and/or pay an early closure fee  if the HELOC is paid off too soon after the credit line is created. 

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Usually not if just paid off (it's a LOC, after all), but only if it's actually CLOSED. (IE: if the property backing it is sold).

Just paying it down to zero will not usually trigger fee reimbursement, as the line is still open and available to draw on.