Building good credit (or any credit at all) doesn’t happen overnight. Instead, if you’re starting from scratch, you may need to have an open credit account for around three to six months before you first get a credit score.
From there, a good credit profile and good credit score can take a while to build. In reality, it can be much faster and easier to lower your credit score, which is why it’s vital to aim to make solid financial choices, like consistently paying your bills on time. Building and maintaining good credit isn’t always easy, but by following a few simple steps, you can improve your standing.
Key Points
• Establishing a credit score takes three to six months after opening a credit account.
• On-time payments are essential for a good credit score.
• Credit scores depend on payment history, credit utilization, account types, age of accounts, and inquiries into accessing credit.
• Opening too many accounts at once can harm credit scores.
• Beware of scams promising quick credit improvement; building credit is gradual.
How Long It Can Take to Build Credit From Scratch?
The exact length of time it takes to build credit from scratch varies. That being said, it’s usually around three to six months from the time you first open a credit account.
Even though establishing and building credit can take time, it’s worth it as a way to improve your overall financial situation. Having good credit can make it easier to get approved for loans and secure lower interest rates.
If you’re hoping to begin building credit, here are some tactics you might consider.
Become An Authorized User
One way to help build your credit is by becoming an authorized user on an account of someone who already has good credit. This might be a trusted friend or family member. As they manage the account responsibly, that can have a positive impact on your credit score as well. Just know that if they miss or make late payments, that can also negatively impact your credit.
If you’re getting a credit card for the first time, know that it is possible to apply for and get approved for a credit card with no existing credit history. However, you do need to be selective about which card you apply for.
You’re unlikely to get approved for, say, a rewards credit card if you don’t already have excellent credit. Still, there are credit cards that are marketed toward those who have no credit or a limited credit history. You might also consider a secured credit card, where you put down a refundable deposit that then serves as your credit limit.
If you can get approved for a credit card, and then use your credit card responsibly, such as by making on-time payments, can help you build up your credit.
If you aren’t able to get approved for a loan on your own, you might consider applying for credit with a cosigner. Using a cosigner with good credit can help improve your chances of getting approved for a loan.
Then, your loan payments will be reported to the major credit bureaus and hopefully help you start building your credit score. Of course, that depends on your making those payments on time.
Maintain Good Credit Habits
Once you have opened a credit account like a loan or credit card, it’s important to practice good credit habits. This includes paying your statement off in full, each and every month. Demonstrating a pattern of reliably paying your bills over time shows potential lenders that you’re likely to repay your debts.
There are five major factors that affect your credit score:
• Credit utilization: Your credit utilization is the amount of the credit you’ve used compared to your total available credit. It’s recommended to keep this ratio to 30% or less.
• Payment history: This indicates how reliably you make payments on your existing accounts.
• Types of credit accounts: Having a good mix of different types of credit accounts has a positive impact on your credit score, as it indicates to lenders that manage multiple types of accounts.
• Your average age of accounts: Having a lengthy credit history is a positive sign. This shows you have experience in responsibly managing accounts.
• New credit: Opening a number of accounts or making a number of hard inquiries in quick succession can suggest to lenders that you’ve overextended yourself and are in need of funding to bail you out.
The first thing you’ll want to do is make a budget. Getting a new credit card should not be viewed as a way to fix your budget or dig yourself out of a financial hole. Instead, the best way to use a credit card is as a tool of convenience for money that you already have. Make sure that you have the financial ability and discipline to pay your bills in full, each and every month.
Watch Out For Scams
Usually building credit is something that you do over a period of several months or years. If someone tells you that they can build or repair your credit quickly, it could be a sign of a credit card scam. There aren’t many shortcuts to the simple rules noted above, like regularly paying your bills on time.
Don’t Open Too Many Accounts At Once
You might think that since opening a credit account can help build credit, opening many accounts will help build credit even faster. However, that is usually not the case. Many lenders view a high number of credit inquiries in a short period of time as a negative indicator. They may see it as a potential red flag that someone is in a bad financial situation.
The Takeaway
If you’re just starting out and have no credit history at all, you generally start without an actual credit score. It can take a few months after you open a credit account to start establishing a score. As you continue to show that you’re responsible for the credit you have, your score will likely increase. Building credit can take time, and you should be skeptical of any people or programs that say they can build your credit fast.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
What credit score do you start with?
There isn’t a starting credit score for those without any credit history. While you might think that you start with the lowest possible credit score (like 300) and have to build your way up, you actually don’t start with any credit score at all. As you open credit cards or other accounts, you’ll start to establish a credit history and score.
How long does it take to build a good credit score?
It usually takes anywhere from three to six months to start building a credit score after you’ve opened your first credit account. You’ll then continue to build and improve your credit by continually making on-time payments. You can always check your credit score periodically to see where you’re at on your credit journey.
How long does it take to recover from a hard inquiry on your credit?
Usually when you apply for a new credit card or other loan, your potential lender will pull your credit file. This is known as a hard inquiry. Since the number of recent hard inquiries is one factor in determining your credit score, applying for credit cards can lower your credit score. However, these inquiries typically only lower your score by a few points and drop off your report after a few months.
How fast can you build your credit in 3 months?
How fast you can build your credit depends on a number of factors. Generally, it takes a few months after you’ve opened a credit account to even establish any credit. Your credit score will improve as you continue to use your credit responsibly. It’s best to think about building credit as more of a marathon than a sprint.
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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.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
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 .
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
A black credit card is a financial product extending a line of credit to wealthy, high-spending consumers. Colloquial references to a black credit card typically refer to the American Express Centurion Card that launched in 1999. It quickly developed a reputation for being more than a credit card — rather, it became a status symbol of ultra wealth and almost limitless spending power.
Here’s a look at what a black credit card is in detail, how to get one, and the card’s benefits and drawbacks.
Key Points
• Black credit cards are designed for wealthy, high-spending individuals and are typically invitation-only.
• These cards have high fees, such as a $10,000 initiation and $5,000 annual fee.
• Benefits include no credit limit, VIP lounge access, travel perks, and personalized services.
• Qualification requires high income, net worth, and significant spending activity.
• These cards can serve as status symbols but come with high costs and stringent spending requirements.
What Is a Black Credit Card?
A black credit card is an ultra-luxury private banking credit card product that’s designed to support the credit needs of the world’s wealthiest individuals, which can include A-list celebrities, professional athletes, and multi-millionaires. These are individuals who likely spend six figures a year using their credit card.
Although the black credit card meaning was originally derived from the AmEx Centurion Card, it now includes other luxury cards that have since come to the market. The list of exclusive card products include the Dubai First Royale Mastercard and the J.P. Mortgage Reserve Card.
Although the Mastercard Black Card might have the phrase “black card” in its name, it’s more accessible and arguably not in the same caliber as the aforementioned cards. That’s because consumers can submit an application online for this card without first being invited, which is more in line with typical credit card rules.
How Black Credit Cards Work
Unlike other consumer credit cards, the most exclusive black credit cards aren’t available for online applications. Card issuers publish very limited details — if any at all — about how to apply for the card or what it takes to receive an invitation. All of the elusiveness can enhance the allure of black cards.
Aside from their exclusiveness, black cards are generally known for having no credit limit, allowing members to spend freely. However, credit card issuers have already determined who they feel is financially capable of wielding the black card’s limitless buying power.
Specific black credit card requirements and thresholds vary between black card products. However, they generally include the following factors:
• Minimum annual spending
• Income and/or net worth
• Creditworthiness
If you believe that you meet the criteria for a black credit card, you can reach out to the card issuer directly to see if you’re eligible. American Express, for instance, may offer existing members an online form for its Centurion Card for those who want to request consideration.
Worth noting: The Centurion Card is currently said to have a one-time $10,000 initiation fee and an annual fee of $5,000 thereafter.
Whether you’re still learning how credit cards work or are experienced with credit, you likely know that different cards offer varying benefits, including rewards, travel and shopping credits, and more. The perks of a black credit card also differ depending on the type of black card.
For example, the AmEx Centurion Card, offers the following black card benefits:
• VIP airport lounges. Access to AmEx’s Global Lounge Collection, including the coveted The Centurion Lounge.
• Travel accommodation enhancements. Upgraded bookings and credits through AmEx’s Fine Hotels and Resorts program, with 900 hand-selected, iconic properties, and elite status with additional hotel programs.
• Airline loyalty status. Complimentary top-tier status through airline partner loyalty programs.
• Unique experiences. Access to one-of-a-kind travel experiences around the world.
• Travel inconvenience credit. Up to a $2,000 credit per traveler for carrier-related inconveniences, like delays, and up to $10,000 for canceled trips.
• Travel insurance. Up to $100,000 in travel medical assistance, and up to $1 million in travel accident insurance.
• Rental car insurance. Up to $75,000 in car rental loss and damage insurance.
• Saks Fifth Avenue credit. Quarterly $250 shopping credit, up to $1,000 per year.
• Equinox fitness club membership. Access to clubs in multiple countries.
• Additional buying protection. Purchase protection, return protection, and extended warranty for goods purchased on the card.
• Personalized support. Access to personal shoppers and 24/7 personal concierge service.
As noted above, fees, benefits, fees, and spending requirements will vary among different types of credit cards, including those that fall into the ultra-luxury category.
As a card that’s not intended for the masses, the card’s pros and cons highly depend on which side of the eligibility spectrum you fall under. Here’s a closer look at black credit card benefits and drawbacks:
Pros of Using a Black Card
Cons of Using a Black Card
No credit limit
Accessible by invitation only
Status symbol
High initiation and annual fees
Luxury perks
High spending requirement
Tailored service experience
High income requirement
Is a Black Credit Card Worth It?
With a reputation of having excessively high annual fees and high minimum spending criteria, a black card can carry a high price tag. It’s important to consider that you can afford this kind of credit card — that is, assuming you’ve received an invitation in the first place.
Weigh the black card benefits, and consider if you’d actually be using a credit cardin such a way that it would be worth it for your needs.
Black cards are typically reserved for wealthy customers who have demonstrated the ability to spend hundreds of thousands on a credit card and repay that amount with ease. If you’re an everyday consumer or it’s your first time getting a credit card, a pricey black card probably isn’t a practical credit card solution.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
🛈 While SoFi does not currently have a black credit card, we do offer credit cards that may suit your needs.
FAQ
What does it mean to have a black credit card?
Being invited as a black card member means that you’ve met the card issuer’s underwriting criteria in terms of having a high income, high net worth, high spending activity, and more. It’s perceived as being a card that’s only accessible to ultra-wealthy individuals.
How much does a black credit card cost?
Black credit card fees vary between card products but often cost hundreds to thousands of dollars in annual fees each month. The AmEx Centurion Card, for example, has a $10,000 initiation fee and a $5,000 annual membership fee thereafter.
Are black credit cards actually black?
Generally, black credit cards are designed with a black color scheme. However, some of these cards that fall into the exclusive black card category aren’t black. For example, the J.P. Morgan Reserve card is made of brass and palladium and has a silver metal finish.
What is the difference between a black card and a platinum card?
The AmEx Platinum Card is more accessible to consumers than the AmEx Centurion Card, also dubbed the black credit card. Members who want to apply for a Platinum Card can do so on their own online, while the black card is offered by invitation only. The requirements and annual membership fees of both cards also vastly differ, with the black category charging higher fees and having higher spending requirements as well as more robust perks.
Photo credit: iStock/Lemon_tm
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.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
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.
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. This is different from a home equity loan, and can help you finance a major renovation or many 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 what is a HELOC, how it works, the pros and cons and what alternatives to HELOC might be.
Key Points
• 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 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 85% of your home’s value, minus whatever you may still owe on your mortgage.
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 apply
Here’s a look at possible HELOC uses:
• 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 spend on a bath remodel in 2023 topped $9,000 according to the American Housing Survey, while a kitchen remodel was, on average, almost $17,000.
• 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 or home equity loan 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, 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.
Difference Between a HELOC and a Home Equity Loan
Here’s a comparison of a home equity line of credit and a home equity loan.
• A HELOC is a revolving line of credit that lets you borrow money as needed, up to your approved credit limit, pay back all or part of the balance, and then borrow up to the limit again through your draw period, typically 10 years.
The interest rate is usually variable. You pay interest only on the amount of credit you actually use. It can be good for people who want flexibility in terms of how much they borrow and how they use it.
• A home equity loan is a lump sum with a fixed rate on the loan. This can be a good option when you have a clear use for the funds in mind and you want to lock in a fixed rate that won’t vary.
Borrowing limits and repayment terms may also differ, but both use your home as collateral. That means if you were unable to make payments, you could lose your home.
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 much and how often 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?
During the first stage of your HELOC (what is called the draw period), you may be required to make minimum payments. These are often interest-only payments.
Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.
Remember that if you have a variable-rate HELOC, your monthly payment could 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:
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 HELOC rate in mid-November of 2024 was 8.61%.
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.
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.
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:
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 (or more!) affordable.
Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.
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.
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.
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.
What Are Some Alternatives to HELOCs
If you’re looking to access cash, here are HELOC alternatives.
Cash-Out Refi
With a cash-out refinance, you replace your existing mortgage with a new mortgage given 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.
What is a home equity loan again? It’s a lump-sum loan secured by your home. These loans almost always come with a fixed interest rate, which allows for consistent monthly payments.
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.
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 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 brokered by SoFi.
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, along with your mortgage.
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.
How do you apply for a HELOC?
First, you’ll shop around and collect a few offers. Once you select the one that suits you best, applying for a HELOC involves sharing much of the same information as you did when you applied for a mortgage. You need to pull together information on your income and assets. You will also need documentation of your home’s value and possibly an appraisal.
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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 .
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.
Financing a car can help you build credit, as long as you manage the loan responsibly and the loan’s activity is reported to one of the major credit bureaus.
Like with most other debt obligations, responsibly making on-time payments can help your credit score. However, making late or missed payments can hurt your credit score, as can the hard pull of your credit report that potential lenders conduct when you apply for an auto loan.
Key Points
• Making regular, on-time payments on a car loan can positively impact credit scores.
• Late or missed payments on a car loan typically have a negative impact on credit scores.
• A car loan adds to the credit mix, which can help build credit.
• Paying off a car loan may reduce credit scores if it affects credit mix or account age.
• Hard credit inquiries from applying for a car loan usually but only temporarily lower credit scores.
How Does Car Financing Work?
While it is possible to pay for a new car with cash, it’s common for many potential auto buyers to use car financing. You may get a car loan for the full purchase price, or make a down payment and get a loan for the rest of the amount.
The lengths of car loans vary but are commonly between 24 and 96 months, with six years (72 months) being the average. After making your payments for the balance of the loan, the loan is paid off and you take full ownership of the car.
Note that your car acts as collateral for an auto loan. This means that if you fail to repay the amount borrowed, the lender can take your car to recoup its losses.
Most car loans are reported to the major credit bureaus, and your payment history and balance is usually included on your credit report. Making on-time payments on your car loan can have a positive impact on your credit. Potential lenders want to see a history of reliably paying your debts, and making payments on a car loan can help with establishing that.
Another factor that makes up your credit score is having a healthy mix of different types of credit. This can be another reason why having an active auto loan can help build credit, as it adds to the types of credit you have.
How Financing a Car Can Affect Credit Negatively
Just as making on-time payments on your car loan can have a positive impact on your credit score, missed or late payments can affect your credit negatively.
Additionally, when you initially apply for an auto loan, the lender will conduct a hard pull on your credit report to verify your creditworthiness. This can drop your credit score by a few points, though those drops usually only last a few months. If you’re working with multiple lenders, keep in mind that hard credit pulls by multiple lenders in a short period of time will usually get combined so it appears as a single inquiry.
And while paying down debt is often a good idea, paying off a car loan affects your credit in some additional ways. If you don’t have other debts or loans, it’s possible that paying off your loan can have a negative impact on your credit score. This is because your on-time payments no longer get reported, and you’ll have one fewer type of credit to your mix. Additionally, if you took out your car loan a while ago, paying it off can impact the average age of your open accounts, which also influences credit.
Factors That Influence Your Credit Score
The biggest factor that influences your credit score is your payment history. Potential lenders want to see that you reliably pay your debts, and making on-time payments is one way to show that. Other factors that influence your credit score are:
• Your average age of accounts
• Credit mix
• How much you owe
• How many recent inquiries appear on your credit report
Tips to Build Your Credit Score
Here are some tips to consider that can help build credit:
• Make sure that you always pay your bills on time.
• As you apply for new debt or credit, only apply for loans that you know you have the financial ability and discipline to pay.
• Aim to keep your credit utilization — the amount of your total credit you’re using — at 30% or lower. Having a higher credit utilization rate can negatively affect credit.
• Remember to check your credit report at least once a year. Not only can this help you to monitor your credit health and understand the impacts of various activities on your credit, it can help you spot any errors or fraudulent activity.
One of the biggest mistakes that you can make when financing a car is applying for a higher loan amount than you can afford. When you take out a car loan, you’re making a multi-year commitment to make those monthly payments. If you take out a loan for more money than you can reasonably afford, you run the risk of destabilizing your overall financial situation and ending up in a situation where you make late payments or, even worse, miss payments.
A car loan can be a good option to help build your credit. Remember, what potential lenders are looking for when they look at your credit report is a history of meeting your debt repayment obligations. A car loan that you regularly pay on time can be a great way of showing that you are reliable.
Also follow additional tips for getting a car loan to help give you a head start toward building your credit.
Other Ways to Build Credit
Aside from turning to car financing to build credit, here are a few other ways to build credit that you might consider.
Become an Authorized User
Another way that you can build credit is by becoming an authorized user on someone else’s credit card account. When you are an authorized user on a credit card account, you’re not financially responsible for paying the statement, but it still shows up on your credit report. Keep in mind that how the primary account holder manages their account can affect your credit score, either positively or negatively.
Another option to build credit is by taking out a personal loan. Unlike a car loan, which is considered a secured loan since the car itself acts as collateral for the lender, a personal loan is an unsecured loan. That means that there is no collateral for the lender to seize if you stop making payments.
In certain situations, this can make a personal loan a great option for building credit. In fact, if an auto loan isn’t the right option, you can consider getting a personal loan for a car.
Apply for a Credit Card
Responsibly using a credit card and paying it off in full each month is another way that you can establish credit. Your credit card balance and payment history are typically reported to the major credit bureaus.
Additionally, some credit cards offer rewards, such as cash-back rewards, with each purchase. Those rewards can be a boost to your monthly budget.
If you take out an auto loan to buy a new or used car, it will typically get reported to the major credit bureaus. That means making on-time payments on your auto loan can help you build credit. Similarly, late or missed payments can have a negative impact on your credit score.
Applying for a credit card and making regular payments can be another way to build your credit.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Does paying off a car loan help build credit?
While making regular payments on your car loan helps you build credit, paying off your car loan doesn’t always have the same impact. When you pay off your car loan, you no longer have the monthly payment history showing up on your credit report. Still, paying off a car loan can be a good financial move since it helps lower the total amount of your debt.
How can I keep my payment within my budget when financing a car?
The monthly payment amount of your car loan will depend on a variety of factors — the total purchase price of the car, your down payment, the length of the car loan and your interest rate. If you want to keep your monthly payment below the average payment for a car, you can get a cheaper car, make a higher down payment, or take out a longer loan. You can also work on building your credit score to hopefully qualify for a lower interest rate.
How fast can a car loan raise my credit score?
While taking out a car loan can possibly build your credit, you shouldn’t count on an immediate positive impact. In the short-term, it’s possible that your credit score may decrease from the new credit inquiries and the additional debt that shows up on your credit report. However, over time, making regular and on-time payments on your auto loan could build your credit score.
Does leasing a car build credit?
Most lease payments are reported to the major credit bureaus. That means that regular, on-time payments can help you build your credit in a similar manner to buying a car with a car loan. However, if you make late payments or miss payments on your lease, it can have a negative impact on your credit score.
Photo credit: iStock/Zorica Nastasic
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.
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 .
This content is provided for informational and educational purposes only and should not be construed as financial advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
If you’re in the market for a new car and are comparing financing options, it may be helpful to know that leasing a car can help you build credit. The big “if” is that this typically only applies if you manage the lease responsibly, paying your debt on time.
In most cases, you’ll need to have good credit to qualify for a lease on a car. If you have poor or no credit, you may have better luck getting an auto loan, although your interest rate may be high. Whether you opt to lease a car or buy one with an auto loan, your payment history is usually reported to the major credit bureaus. As such, making on-time and regular payments can help build your credit.
Key Points
• Leasing a car builds credit with on-time payments, reported as an installment loan.
• Good credit, often 670+, is needed for leasing.
• Buying with an auto loan is an alternative for those with lower credit.
• Having a cosigner or a large down payment aids lease approval for individuals with low credit.
• Leasing offers lower payments, the possibility of upgrades, but can include mileage limits while lacking equity.
Leasing vs Buying a Car
When you buy a car, you agree on a purchase price with the seller. You then can either pay for the full amount of the car at the time of purchase or use an auto loan for some or all of the purchase amount.
With a lease, you may put some money down, and then you will pay a fixed amount each month for the duration of the lease. Your monthly lease amount will be based on how much the car is worth at the end of the lease period.
At the end of your lease, you can either return your vehicle to the lessor or buy your leased car.
It’s also important to keep in mind that leasing a car often comes with some restrictions on how you use your car, which is not the case with buying a car. If you lease, you might have limits on the number of miles you can drive during the lease term, for instance.
Both buying and leasing a car can impact your credit score, since your monthly debt obligation and your payment history (positive or negative) are usually reported to the big three credit bureaus and show up on your credit report. A car lease is typically reported as it’s considered an installment loan.
Beyond knowing whether leasing a car builds credit, it’s important to be aware of the pros and cons of leasing a car. By understanding the upsides as well as the drawbacks, you’ll be better able to choose between leasing or buying a car.
Here’s an overview of the major pros and cons of leasing a car to consider:
Pros
Cons
Leasing can often offer lower monthly payments than buying the car outright.
There may be restrictions on how you use the vehicle, such as the number of miles you can drive during the lease.
You can potentially upgrade your car every few years.
You don’t actually own the car, so you won’t build any equity to show for your monthly payments.
The lease may include coverage for maintenance and some repairs.
You may get charged for excessive wear and tear on the vehicle.
In most cases, your lessor will report the payments you make on a leased car to the major credit bureaus. This means that a car lease will show up as what’s on your credit report as an installment loan, and your payment history will be recorded. This can help your credit if you make on-time payments, but it may have a negative impact if you miss a payment or the lease becomes delinquent.
The exact credit score needed to lease a car will depend on the lender or lessor that you use, but you generally will need to have good or excellent credit (meaning 670+) to qualify for a lease. If you don’t have a good credit history or are still working on improving your credit, leasing a car may not be the right fit for you.
When credit is extended to those with a lower score, it can be associated with a higher rate of car repossessions, meaning the lessee defaulted on the loan.
Alternatives to Leasing a Car
If you’re not able to or don’t want to lease a car, you do have some other alternatives.
Buying a Car With an Auto Loan
You might qualify more easily for a car loan rather than a lease if your credit isn’t great. While your monthly payment may be higher with a purchase as compared to a lease (since you’re buying the car rather than just leasing it for a short period of time), that may still end up being the right option for you.
You will want to keep in mind that auto loan interest rates often vary depending on your credit score. That means that someone with fair credit will likely have a higher interest rate than someone with good or excellent credit.
Another possibility if you can’t qualify for a lease is to use a cosigner. If you have a trusted friend or family member with good or excellent credit who is willing to cosign on your auto lease, you may stand a better chance of getting approved.
When you use a cosigner, the potential lessor can use the credit score and profile of both the primary applicant and the cosigner in determining whether to approve the lease.
Making a Large Down Payment
If you’re able to, you might consider making a large down payment as part of your auto lease. While you still may not be approved, providing a large down payment shows the potential lessor that you are serious and committed. Making a large down payment also will lower your required monthly lease payment, which may help you get approved as well.
Tips for Building Your Credit for the Next Lease
If you want to build your credit to prepare for your next car lease, there are a couple of things you can do:
• Improve your overall financial situation. For one, you can work on solidifying your finances overall, including setting up a budget and paying down debt. Remember that owning a car means you have to pay not only for your monthly car payment but also auto-related expenses like repairs, gas, and car insurance.
• Use credit cards responsibly. Responsibly using credit cards is another way to improve your credit profile. Make sure you’re paying off your monthly statement in full each and every month.
The Takeaway
Leasing a car can build credit in much the same way as taking out an auto loan. When you lease a car, it is reported as an installment loan on your credit report. Your payments (either on-time or late) are also reported to the major credit bureaus and can have a positive or negative impact on your credit score, depending on how you manage your debt.
If you’re looking to build your credit profile, another path to consider might be a credit card.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Does leasing affect your credit score?
Yes, leasing can affect your credit score, since activity is usually reported to the major credit bureaus in a very similar way to an auto loan. A lease will be reported as an installment loan, and your payment history will be included on your credit report. That means that regular and on-time payments can help build your credit score, while late payments or delinquencies can hurt your credit score.
Can I lease a car with a low credit score?
Generally, potential lessors are looking for lessees with good or excellent credit. There are a variety of reasons for this, including a higher rate of delinquencies or car repossessions associated with less favorable credit. If you have a low credit score, you may not be able to qualify for a lease and may need to consider alternatives.
What is the minimum credit score I can lease a car with?
The exact minimum credit score that you’ll need to lease a car will depend on a variety of factors. These include the specific lessor you’re working with, the car you’re considering leasing, and your overall financial situation. Many lessors are looking for people with good or excellent credit, meaning 670 or higher. If your credit is below that, you may not be able to qualify for a lease.
Photo credit: iStock/EmirMemedovski
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.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
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 .
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
