A credit reporting agency compiles credit reports and provides that information to prospective lenders and others. Today, there are three main credit reporting agencies in the U.S.: TransUnion®, Equifax®, and Experian®. Though each agency serves a similar purpose, there may be some differences in the type of information found in their credit report.
Let’s take a closer look at credit reporting agencies and the differences between TransUnion and Equifax.
• TransUnion and Equifax are credit reporting agencies that compile and provide credit reports and scores.
• TransUnion uses the VantageScore 3.0 model, while Equifax offers an educational credit score.
• TransUnion provides daily updated credit reports and $1 million identity theft insurance.
• Equifax offers dedicated ID restoration specialists and $500,000 identity theft insurance.
• Both agencies allow consumers to dispute inaccuracies in their credit reports.
What Is the Role of Credit Reporting Agencies?
Credit reporting agencies, also known as credit bureaus, collect the information necessary to maintain credit reports. All credit reporting agencies manage their own records, which means the information they have about a consumer can differ depending on the information that was reported to them. While the reports may vary, no one credit reporting agency carries more weight than the other.
What Are Credit Scores?
A credit score is a number used by lenders to determine the risk level associated with lending money to a consumer. A borrower’s credit score can influence if a lender decides to work with a borrower and if so, how much credit, what terms, and how high of an interest rate they end up getting.
Credit scores are based on a consumer’s credit report. Everyone has more than one credit score as these scores are calculated by the three main credit reporting agencies.
Some lenders use internal scoring models as well, but generally, it’s more common for lenders to use one of the three main agencies’ reports to inform their lending decisions.
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What Are Credit Reports?
A credit report details information about a consumer’s financial life, such as:
• Payment history
• Outstanding balances
• Length of credit history
• Applications for new credit accounts
• Types of credit accounts (such as mortgages or credit cards)
Credit reports from each of the three major credit bureaus can be accessed weekly free of charge via AnnualCreditReport.com.
Need help keeping tabs on your finances year-round? Consider using a spending tracker, which can be useful when it comes to making progress toward short- and long-term financial goals.
An Equifax credit score isn’t used by lenders or creditors to assess a consumers’ creditworthiness. Instead, many lenders use FICO Scores® to help determine a potential borrower’s creditworthiness. FICO uses credit scores from the three reporting agencies, including Equifax and TransUnion, to determine their score. Equifax recommends aiming for a score of 739 or higher if a “good” score is desired.
The Equifax credit score model falls on a credit rating scale that starts at 280 and ends at 850. The higher a score is on this scale, the better indication that the consumer poses a lower risk to creditors.
TransUnion and Equifax calculate credit scores differently. An Equifax credit score is an educational credit score. The point of this credit score is to provide consumers with the knowledge to help them predict their general credit position.
How Does TransUnion Calculate Credit Scores?
When it comes to TransUnion credit scores, this agency uses an outside model, the VantageScore® 3.0 model. The VantageScore scoring model ranges between 300 and 850 points. According to TransUnion, a “good” credit score to have on the TransUnion and VantageScore 3.0 model is between 661 and 780. VantageScores are an alternative to FICO Scores that are used by some lenders to inform their lending decisions.
What They Offer
Alongside credit scoring and credit reports, both of these credit agencies have unique offerings to help consumers understand their credit better and to provide protection against fraud.
TransUnion Offerings
TransUnion members ($29.95 per month) gain access to:
• Unlimited access to credit score and reports that are updated daily
• Recommendations to help improve credit score
• Their product, Credit Lock Plus, which allows individuals to lock their TransUnion & Equifax reports
• Up to $1 million in identity theft insurance
Equifax Offerings
Signing up for Equifax Complete ($9.95 per month) gives members access to:
• Equifax credit report monitoring
• Daily access to VantageScore credit score and Equifax credit report
• Dedicated ID restoration specialists to help members recover from identity theft
• Up to $500,000 in identity theft insurance
TransUnion vs Equifax: Which Is Most Accurate?
So, which credit report is most accurate? When it comes to accuracy, all three credit reporting agencies are responsible for ensuring that credit reports are accurate. No one agency is more accurate than the other. That being said, mistakes can happen.
Consumers may want to keep a close eye on their credit report to make sure that mistakes haven’t occurred — especially as these mistakes can negatively impact credit scores. To report errors found on a credit report, consumers can follow this process:
1. After finding errors on a credit report, write a letter that disputes these errors and include any supporting documentation that can strengthen the case against the error. You can find a sample letter here .
2. Send the letter and documentation to the credit reporting agency and the information provider (like a bank or credit card company) that reported the inaccurate information to the credit reporting agency in question. Both the credit reporting agency and the information provider will be responsible for fixing credit report inaccuracies or incomplete information.
3. If the written dispute does not result in the mistake being resolved, the next step would be to file a complaint with the Consumer Financial Protection Bureau.
TransUnion Disputes
TransUnion disputes can be filed on their website or by mail. After the documentation has been received, it can take up to 30 days to resolve the dispute.
Try to include as much of the following information as possible in the communication:
• Name
• Partial account number of the disputed item (from credit report)
• Current address
• TransUnion file number (if applicable)
• Social Security number
• Date of birth
• Name of the company that reported the item that needs disputing
• Reason for the dispute
• Any corrections to personal information that needs to be made
Disputes can also be made by phone.
Equifax Disputes
Equifax disputes can be made online, by phone, or by mail. Consumers will generally want to provide as much of the following information and documentation as possible or applicable:
• Valid driver’s license
• Birth certificate
• Copy of a utility bill
• Current bank statements with account information
• Letters from a lender showing the account in question has been corrected
• Proof that an account error was the result of identity theft
• Bankruptcy schedules and other court documents
• Student loan disability letters
• Canceled checks
Results are generally completed within 30 days.
No matter which agency you use, it helps to have a holistic view of your finances. Using a money tracker app is one way to help you manage your spending and saving.
TransUnion and Equifax are two of the major credit bureaus in the U.S. They collect information about a consumer’s financial life, such as their payment history, applications for new credit, and existing credit. This information is recorded in the form of a credit report. Based on information in the credit report, each bureau determines credit scores based on their own scoring model. However, TransUnion and Equifax calculate credit scores differently, and both have unique offerings that help consumers better understand their credit and protect themselves in the event of fraud.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
See exactly how your money comes and goes at a glance.
About the author
Jacqueline DeMarco
Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Credit matters when looking to buy a house, car, or any other pricey asset. Unless a consumer is flush with cash, the path to home and vehicle ownership may go through a mortgage or a loan. Good credit can provide you with terms and privileges not available to a person with poor credit, including lower interest rates and increased borrowing capacity.
We delve into what constitutes a good credit score and the reasons why it is important to have a good credit score.
Key Points
• Good credit is essential for securing loans with favorable terms and interest rates.
• A strong credit score can lead to better insurance rates and lower premiums.
• Landlords often check credit scores to assess rental applications, making good credit crucial.
• Employers may review credit reports during the hiring process, which could impact job opportunities.
• Good credit can result in higher credit limits and better rewards from credit card companies.
What’s Considered Good Credit?
Consumers with standard credit scores of 661 or greater are generally considered to have good credit, because they rank as prime or super prime in terms of their risk assessment. A bad credit score falls on the lower end of the range, and a good credit score falls on the higher end of the range.
Many credit scoring models, including the standard FICO® Score and VantageScore®, measure an individual’s credit risk on a three-digit scale ranging from 300 to 850. The highest risk group are consumers with deep subprime credit scores from 300 to 500, and the lowest risk group are consumers with super prime credit scores from 781 to 850, according to Experian.
Consumers may build and attain good credit by paying their bills on time, maintaining a mix of accounts, and keeping their revolving balances under 30% of credit limits.
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8 Benefits of Good Credit
Here are the eight core benefits of good credit, which highlight why it is important to have a good credit score:
Benefit #1: Easier Access to Credit
Good credit may provide you with easier access to additional credit. When a consumer applies for a credit card or personal loan, lenders may analyze the consumer’s credit report and credit score to make an informed decision on whether to approve or deny the application. A person with good credit is considered low-risk and therefore has an easier time getting approved for a personal loan compared to high-risk borrowers.
SoFi’s money tracker app allows you to monitor and keep track of your credit score, among other perks that could assist with financial planning and managing your net worth.
Benefit #2: Lower Interest Rates
Consumers with good credit may qualify for lower interest rates when borrowing money. For example, available financing data for new vehicle purchases in the fourth quarter of 2024 show consumers in the deep subprime category of bad credit have obtained auto loans with 15.75% interest on average. Meanwhile, consumers in the super prime category of excellent credit secured 4.77% interest rates on average. That amounts to a nearly 11 percentage point difference in interest rates.
Benefit #3: Lower Car Insurance Premiums
Many auto insurance companies use credit-based insurance scores to help categorize consumers by risk and determine what premiums they may pay. Under this practice, higher-risk consumers may pay higher auto insurance premiums than lower-risk consumers. In some states, having good credit or improving your credit score may lead to lower auto insurance premiums over time.
Benefit #4: Increased Borrowing Capacity
Consumers with good credit may obtain larger credit limits than those with poor credit. This could translate to greater spending power on a credit card and the ability to make larger purchases on credit. Having good credit also puts you in a better position to apply for and obtain new credit.
A bolstered borrowing capacity is not limited to credit cards either — credit unions and banks may offer personal loans to consumers with good credit. Such loans can help you consolidate debt, finance large purchases or obtain fast cash to weather an unforeseen emergency. Personal loans also may command lower interest rates than credit cards.
Benefit #5: Easier to Buy a Home or Car
Good credit can help you buy a house with a good mortgage rate or a car with affordable financing. Borrowing money to own a home or vehicle comes at a price that includes principal and interest. Consumers with good credit may qualify for 0% annual percentage rate loans for a car, where no APR means no interest or finance charges. Establishing good credit may also improve your likelihood of obtaining a low-APR mortgage, which translates to lower debt repayment obligations.
Automotive consumers had an average credit score of 749 for new vehicle purchases and 687 for used vehicle purchases in the fourth quarter of 2024, according to Experian’s quarterly report. This shows the average automotive consumer boasted good credit within the prime category of low risk.
Signing a lease to an apartment may require good credit. Landlords who conduct credit checks might deny lease applications if a prospective tenant has bad credit. Or, those with poor credit may have to provide a higher security deposit for rental housing compared with a prospective tenant who boasts good credit. Tenants with good credit also may have more leverage to negotiate for lower rent.
Jobseekers can benefit from good credit, as some employers may consider a person’s credit score when making hiring decisions. The U.S. Department of Housing and Urban Development says that a low credit score or credit invisibility is a burden that can “limit housing choice and employment opportunity,” whereas “a good credit score is part of the pathway to self-sufficiency and economic opportunity.” The term “credit invisible” refers to consumers who lack a credit score or credit history.
Benefit #8: Ability to Obtain Security Clearances
Law enforcement officers with good credit could gain privileged access to classified national security information and FBI facilities. Any state or local law enforcement officer seeking a security clearance has to first satisfy a comprehensive background check that includes a review of credit history. The FBI shares secret or top secret information with local law enforcement officers who have obtained security clearances.
Poor credit history would not necessarily disqualify an officer from obtaining a security clearance, but significant credit history issues “may prevent a clearance from being approved,” according to information posted on the FBI’s website.
The Takeaway
Good credit is important for anyone who wishes to borrow money to help finance key purchases. Many consumers rely upon mortgages and loans to buy houses and cars, while many cash-strapped individuals turn to credit cards to buy essential goods and services ranging from food and electricity to water and rent for housing. The eight benefits of good credit highlighted above showcase why it is critical to pay your bills on time and practice good budgeting.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
See exactly how your money comes and goes at a glance.
Photo credit: iStock/AndreyPopov
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit (HELOC). What is a HELOC? Well, for starters, it’s different from a home equity loan. But like a home equity loan, it can help you finance a major renovation or cover other expenses.
Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC. Let’s take a look at how a HELOC works, the pros and cons, and what alternatives to HELOC might be.
• A HELOC provides borrowers with cash via a revolving credit line, typically with variable interest rates.
• The draw period of a HELOC is 10 years, followed by repayment of principal plus interest.
• Funds can be used for home renovations, personal expenses, debt consolidation, and more.
• Alternatives to a HELOC include cash-out refinancing and home equity loans.
• HELOCs offer flexibility, but remember that variable interest rates may result in increased monthly payments, and a borrower who doesn’t repay the HELOC could find their home at risk.
How Does a HELOC Work?
The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 90% of your home’s value, minus whatever you may still owe on your mortgage. (You can roughly calculate home equity before you apply for a HELOC by using online property estimates; ultimately your lender will likely do an appraisal.)
Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when applying.
Here’s a look at what is a HELOC good for:
• HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average cost of a bathroom remodel topped $12,000 in 2025 according to Angi, while a kitchen remodel was, on average, almost $27,000.
• Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).
• A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.
HELOC Options
Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:
• Fixed Rate: With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.
• Variable Rate: Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.
• Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.
Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.
HELOC Requirements
Now that you know what a HELOC is, and the basics of how does a HELOC work, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:
• Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.
• A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.
• Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.
Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.
Example of a HELOC
Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000, and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:
$300,000 x 0.8 = $240,000
Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:
$240,000 – $200,000 = $40,000.
One other aspect to note is a HELOC will be repaid in two distinct phases:
• The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.
• The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.
If you’re ready to apply for a home equity line of credit, follow these steps:
• First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates, and how often and by how much it can change.
• Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.
• When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.
• Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.
How Much Can You Borrow With a HELOC?
Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.
Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.
Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.
Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value ($500,000) = CLTV (0.84)
Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.
In this example, the liens on your home would be a first mortgage with its existing terms at $300,000, and a second mortgage (the HELOC) with its own terms at $120,000.
How Do Payments On a HELOC Work?
A HELOC is distinguished from other types of loans by its two-phase payment structure. During the first stage of your HELOC (the draw period), you can borrow against your credit line, up to the approved ceiling, but you may be required to make only minimum payments. These are often interest-only payments. (Of course, if you choose to repay all that you owe, you can then borrow against the entire credit line again, and again, up to the end of the draw period.)
Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.
Interest-Only vs. Principal and Interest Payments
After the draw period ends and the repayment period begins, you’ll begin making monthly payments that, similar to a home mortgage loan, include both principal and interest. For some borrowers, the end of the interest-only period can be a bit of a shock to the budget, so make sure you are prepared and know when the draw period is ending (often at the 10-year mark). A HELOC repayment calculator can help you understand what your payments might be based on how much you borrow.
Remember that if you have a variable-rate HELOC, your monthly payment will fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.
Pros of Taking Out a HELOC
Here are some of the benefits of a HELOC:
1. Initial Interest Rate and Acquisition Cost
A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average rate for a $100,000 HELOC in March 2025 was 7.61%.
Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.
The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.
2. Taking Out Money as You Need It
Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.
3. Only Paying Interest on the Amount You’ve Withdrawn
Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.
Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.
Cons of Taking Out a HELOC
Now, here are some downsides of HELOCs to consider:
1. Variable Interest Rate
Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less affordable (or more!).
Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.
2. Potential Cost
Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.
3. Your Home Is on the Line
If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.
Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.
4. It Could Affect Your Ability to Take On Other Debt
Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.
Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.
Alternatives to HELOCs
If you’re looking to access cash, here are HELOC alternatives.
1. Cash-Out Refi
With a cash-out refinance, you replace your existing mortgage with a new mortgage based on your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.
Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.
Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.
HELOCs and home equity loans are often confused. Both are second mortgages (assuming you still have your first mortgage) that allow you to borrow against your home equity. The key difference in the HELOC vs. home equity loan comparison: With a home equity loan, you get a lump sum all at once and begin repaying what you owe (principal plus interest) immediately. A HELOC, as noted above, works more like a credit card. You borrow what you need in increments before you reach your repayment term.
Another difference: Home equity loans almost always come with a fixed interest rate, which allows for consistent monthly payments. HELOCs typically have a variable rate.
3. Personal Loan
If you’re looking to finance a big-but-not-that-big project for personal reasons, and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.
With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.
A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.
4. Reverse Mortgage
If you are 62 or older, a reverse mortgage could allow you to turn part of your home equity into cash. Funds can be paid out as a lump sum, a monthly payment, or available as a line of credit, and are repaid when the home is sold. Borrowers who want a reverse mortgage usually turn to a home equity conversion mortgage, or HECM, which has fairly rigid standards. All owners must be at least age 62, and the home must be paid off or largely paid for.
Note: SoFi does not offer home equity conversion mortgages (HECMs) at this time.
5. Bridge Loan
A short-term bridge loan lets owners use the equity in their existing home to help pay for a home they’re ready to purchase. A bridge loan is secured by the first home and typically issued by a lender who will be the lender on their new mortgage. If you’re buying and selling a home at the same time, a bridge loan might be an appropriate way to help cover costs in the transitional period, such as when closing dates on the two properties don’t align.
Note: SoFi does not currently offer bridge loans for home financing.
The Takeaway
If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The interest rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.
FAQ
What can you use a HELOC for?
It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.
How can you find out how much you can borrow?
Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.
How long do you have to pay back a HELOC?
Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period, and the second 10 years are the repayment phase.
How much does a HELOC cost?
When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.
Can you sell your house if you have a HELOC?
Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, after any mortgage principal is paid off.
Does a HELOC hurt your credit?
A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945. All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee. Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A lot of basic “adulting” involves a credit score. Renting an apartment? The landlord will want a credit score. Financing a car? Lenders need to see a credit score. Buying a home? You get the point.
A low or nonexistent score can get in the way of your life plans. But a few simple steps can set you on the path to success.
Key Points
• Credit scores update every 30 to 45 days, reflecting recent financial activities.
• Checking your own credit score does not impact the rating; it is a soft inquiry.
• Hard inquiries, such as loan applications, can temporarily lower credit scores.
• Payment history, credit utilization, and credit history length significantly influence credit scores.
How Many Credit Cards Do You Need?
Don’t own a credit card yet? Getting a card is a simple way to start establishing credit. (People who already have a card with a balance might want to focus on paying it off instead of applying for a new one, though.) However, it’s crucial to use a card wisely. Otherwise, cards can do more harm than good.
Most people should consider applying for just one card, not five. And keep in mind that just because someone has a card doesn’t mean they have free money. Opening one new line of credit and using it responsibly is a good way to build credit.
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While some people out there believe credit cards are the root of all evil, they can boost credit scores in multiple ways if used correctly. The most common credit score model is issued by FICO®. Your FICO Score is comprised of five factors:
• Payment history: 35%
• Amount owed: 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%
Credit cards can be an effective tool in a new credit builder’s toolbox. When someone uses a credit card responsibly, this can potentially have a positive effect on all five FICO categories.
Payment history: Making monthly payments on time (even just minimum payments) can help your credit score. As you make consecutive monthly payments, your score should gradually increase — as long as you remain responsible with your finances in other areas of your lives.
Amount owed: Everyone has something called a credit utilization ratio, sometimes referred to as a debt-to-credit ratio. This is the ratio of debt you owe versus how much debt you can owe.
Credit cards have credit limits. Let’s say Dana’s credit limit is $10,000, and she owes $5,000 on her card. Her credit utilization ratio is 50%. If she pays off $1,000 and only owes $4,000, her ratio is 40%. The lower the ratio, the better. That’s why older adults often lecture teens and early 20-somethings to pay off their card balances in full. A low ratio means better things for borrowers’ credit scores.
Length of credit history: The longer you have a line of credit, the better it is for your score. Ideally, someone would open their first credit card and keep it for years while making payments on time and keeping their balance low.
Those who already have a credit card but have racked up debt may want to think twice before canceling their card for this very reason. They might be better off working to pay off the balance aggressively and keeping the card for longer. But if they want to remove the temptation to keep charging the card, they can cut up the credit card, like Rachel does in Friends. This way, the card isn’t sitting in their wallet, but their line of credit is still open.
Credit mix: FICO likes it when people have multiple types of debt. A recent college graduate’s only debt might be student loans. To improve their credit mix, they might consider getting a credit card as well.
New credit: When someone applies for a card, the issuer checks their credit score to determine whether they’ll be approved and what the interest rate should be. This is known as a hard credit inquiry.
A bunch of hard credit inquiries in a short amount of time looks bad for a credit score, especially for someone whose score is already low. Besides, by limiting themselves to only one card, young people who are still learning the ropes of establishing credit might be less inclined to spend recklessly.
Young people with low credit scores (or even no scores at all) may not be accepted if they apply for a top-notch credit card. Another option is to apply for a secured credit card. This type of card is meant specifically for people who want to build credit.
To use a secured credit card, people make a cash deposit to back their credit card account. The deposit amount typically becomes their spending limit. For example, John makes a $100 deposit when he receives his secured credit card. He can charge up to $100 to his card before paying it off. As long as he makes payments, he can keep charging to the card as long as the balance doesn’t exceed $100. If John doesn’t make payments on time, the issuer can take money from his cash deposit.
Secured cards benefit both the consumer and issuer. The consumer can build credit, and a cash deposit makes it less risky for the issuer to do business with someone who hasn’t yet proven that they can make payments on time.
What happens to that cash deposit down the road? If all goes well, people should get back their money. Many reputable credit card issuers offering secured credit cards give consumers the option to upgrade to a regular “unsecured” credit card once their credit score improves. When the user upgrades, they should receive that deposit back.
People researching secured credit cards may want to look for issuers who will let them transition to an unsecured card. This can simplify the process of switching to a regular credit card. Plus, the borrower won’t have to hang onto an unnecessary card or cancel the secured card later — which can help the “length of credit history” part of their FICO score!
Become an Authorized User on a Parent’s Credit Card
Some people may not trust themselves to use a credit card without racking up a ton of debt. Or they have the exact opposite fear: They might never use it, so they wouldn’t be making payments to boost their payment history. The latter fear may be the case for young people who are still receiving financial help from their parents and therefore don’t have many expenses to put on a card.
In either of these cases, young people might consider becoming an authorized user on a parent’s credit card. The parent can call the credit card issuer to officially put their child’s name on the card.
Young people should only add their name to a parent’s card if the parent has a high credit score and solid financial habits. If the parent starts to miss payments or accumulate a ton of debt, it will negatively affect the authorized user’s credit score.
Establishing credit through a parent’s card can help someone acquire a decent score before getting their own credit card. If they have a good credit score prior to applying for their first card, they might be approved for a harder-to-get card at an attractive interest rate. After receiving their own card, they might decide to remove their name from the parent’s card so they can have sole control over their personal credit score.
Pay Bills on Time
We’ve established that making monthly credit card payments positively contributes to the “payment history” part of a credit score. Credit cards aren’t the only things people can pay on time, though. Making timely payments on things like car loans or student loans also helps.
Certain bills don’t show up on credit reports, such as cell phone bills and insurance payments. While paying those bills doesn’t improve people’s credit scores, skipping payments can certainly hurt their scores. When people default on their payments, their credit scores can take a major hit. So it’s important for people to pay all their bills, even the ones that aren’t on their credit reports.
Take Out a Credit-Builder Loan
Just as secured credit cards exist for people trying to build credit, there are special loans for this purpose as well. These are called credit-builder loans, and they are usually offered by smaller banks and credit unions.
When people take out credit-builder loans, the loan amount is held in a separate bank account until the borrower pays off the full amount. By making payments on time, the “payment history” part of people’s scores should gradually improve. Borrowers do have to pay interest on the loan, and the percentage will depend on the lender. But there’s a huge bonus: Once people pay off the loan, they get to pocket the full loan amount and the interest they’ve paid. Not only do they walk away with a better credit score, but they now have money to put toward their emergency fund or student loan payments.
While people don’t need a good score to be approved for a credit-builder loan, they do need proof that they earn enough money to make monthly payments on time. They may need to provide documents such as bank statements, employment information, housing payments, and more.
Considering taking out a credit-builder loan? When shopping around, it is a good idea to keep an eye out for factors like APR, required documents, term length, loan amount, and additional fees before making a decision.
Keep Track of Your Credit Score
Many people have no idea what their credit score is. By regularly checking their score, they can know exactly where they stand and how much progress they need to make to reach their goals.
Some people may be concerned that checking their credit score can lower their score. But don’t worry, only “hard inquiries” affect credit scores. Hard inquiries occur when issuers or lenders check borrowers’ scores to determine whether to approve them for a credit card or auto loan, for example. But when a person checks their own score on a website or money tracker app, this is considered a “soft inquiry” and doesn’t affect their score.
The Takeaway
When establishing credit, keep in mind that “slow and steady wins the race.” People shouldn’t get discouraged when their credit score doesn’t surge after two months of making payments on time. And if they do get discouraged, they shouldn’t give up. The important thing is to continue making payments on time and using a card responsibly. The reward will come.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Taking a break from financial obligations can offer some breathing room, but it’s important to understand how deferred payments may affect your credit score.
