Your credit rating, often shrouded in mystery, plays a crucial role in financial health, affecting everything from getting approved for a mortgage to the interest rate on a car loan. Having good credit, as sometimes measured by a credit score that ranges from 700 to 740, allows you to qualify for loans with lower interest rates, which means you’ll save money over the life of the loan. Good credit also makes it easier to get approved for home mortgages, car loans and credit cards, often with higher loan amounts or limits. Beyond borrowing, a good credit history and score can influence other aspects of your life, such as securing rental housing or improving your insurance rates.
Did you know you can enhance your credit history (and score) over the long term by using a Home Equity Line of Credit (HELOC)? Read on to learn how.
What is a HELOC?
A HELOC is a line of credit that allows you to borrow money using your home as collateral. A HELOC, like a credit card, offers a revolving line of credit you can draw from as needed. You can borrow from the credit line and, as you pay back what you’ve borrowed, your available credit is restored. You can borrow as much or as little as you need during the draw period, which is usually 10 years, up to your credit limit. After the draw period is over, you’ll start the repayment period, which typically also lasts 10 years, to pay off the remaining balance.
How a HELOC can help you build and enhance your credit
A HELOC can be a valuable tool for establishing a strong credit profile over time. By making timely payments on your HELOC, you avoid late fees and positively impact your payment history, which is an important factor in your credit score. Having a HELOC also increases your available credit, which, depending on how you use it, can lower your credit utilization ratio— another key credit score factor. Provided you borrow within limits, make timely payments and consistently pay down your principal balance, you can use a HELOC to build your credit and accomplish goals, such as:
- Completing home improvements, like renovations, that can increase the value of your house
- Consolidating high-interest debt, such as credit card balances or student loans, into one lower-interest loan
- Paying for tuition and other education-related costs
- Covering emergency expenses, such as medical bills or urgent repairs
- Purchasing a vehicle or expensive appliance
Using your HELOC responsibly
To successfully use a HELOC to build and enhance your credit, it’s important to understand the most basic terms of the credit line. The interest rate will either be variable, which means the rate could change from month to month based on changes in the index used to calculate your variable rate, or it will be fixed, which means it will remain the same for the term of your advance (or the loan). When you open a HELOC, the advances are usually charged a variable rate, but some lenders, including Bellco Credit Union, also offer the option to take advances that are charged a fixed interest rate. Make sure to discuss these options with the lender so you understand how and when you can secure a fixed rate, since doing so can protect you from rising interest rates. Knowing how much interest you can expect to pay on what you borrow each month will help you plan for and complete your regular monthly payments.
The other term to keep in mind is the repayment period that follows the draw period. With most HELOCs, the repayment period is 10 years. This is the time that your monthly payments usually go from interest-only to principal and interest, which will dramatically increase the amount of your monthly payments. Knowing your specific repayment period and tracking the timeframe as you borrow and pay off the balance is key for budget planning. If you can afford it, you should decrease your principal balance as much as possible before you enter the repayment period.
Another important measure you can take to protect your credit is to avoid overspending by only drawing on your HELOC for necessary expenses and ensuring you can afford the payments each month. Schedule an occasion each month to review your balance, your upcoming expenses and your budget for repayment. This way, you’re using the HELOC as a tool, not a source of income.
Finally, you can manage potential fluctuations in the value of your home and your available equity by regularly monitoring the real estate market and maintaining a reasonable loan-to-value ratio (the total amount you owe secured by the home versus the amount the home is worth). This approach helps safeguard your financial stability and ensures your HELOC remains a beneficial financial tool, not a burden.
Interested in getting started?
Discover Bellco’s Home Equity ChoiceLine, which enables you to lock in up to three fixed-rate advances at any one time during the draw period.
- Please speak to a tax consultant about the deductibility of any payments made towards your HELOC.
