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Your credit score affects your financial future, so it’s important to know where your score comes from and the different ways it can be calculated. Most important, you should know that the score you’re seeing may not be the score your lender is seeing. Why is this, and what can you do about it?

Two major companies are responsible for billions of credit scores (this is no hyperbole) provided to lenders and consumers: FICO® and VantageScore® Solutions. The difference between VantageScore vs. FICO credit scores is subtle, reflecting each company’s special calculation.

We’ll explain what goes into score calculations. We’ll also tell you where to find your score, how to use it, and which score lenders use in their decisions.

Why Credit Scores Are Important

Before we get into score calculation, let’s review why credit scores are so important. When you need to borrow money, you want to do it as cheaply as possible. This means you want a great interest rate and terms that help you repay your debt as efficiently as possible.

Generally speaking, the higher your credit score, the more likely you are to get the best interest rate and loan terms. Over the course of your life, a good credit score can save you a significant amount of money.

Knowing how to read a credit report and how your credit score is calculated can help you make moves to improve it. Take a look at how the two major players come up with your credit score.

Recommended: What Is a Fair Credit Score?

What FICO Takes Into Account

The Fair Isaac Corporation, more commonly known as FICO, developed the FICO score in 1989. Scores range from 300 to 850. The higher the number, the better your score.

FICO scores are calculated based on how a consumer handles debt and weighted according to the following categories:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

As you can see, FICO scores give the most weight to your payment history and amounts owed. FICO also considers your length of credit history, credit mix, and new credit.

FICO has multiple versions of their credit scoring models, much like software has multiple updates. FICO provides different scoring models to lenders that serve different needs. Credit card issuers, auto loan lenders, and mortgage originators may use different FICO scores to make lending decisions.

What’s calculated in a FICO vs. a VantageScore is subtly different.

Recommended: What Credit Score is Needed to Buy a Car?

What VantageScore Takes Into Account

VantageScores were developed in 2006 by the three main credit bureaus: Experian, Equifax, and Transunion. Scores range from 300 to 850, just like FICO scores. However, even though the scores are calculated on the same scale, a VantageScore will be different from a FICO score. That’s because the factors, and how they’re weighted, are a little different. VantageScores are based on:

•   Payment history: 40%

•   Depth of credit: 21%

•   Credit utilization: 20%

•   Balances: 11%

•   Recent credit: 5%

•   Available credit: 3%

Naturally, this results in a different score. Since many lenders use FICO Score and consumers often see VantageScores, some lending decisions can take consumers by surprise.

The most common VantageScore versions are VantageScore 3.0 and 4.0. Many banks and credit issuers use VantageScore 3.0 vs. FICO Score.

VantageScore vs FICO: The Differences

The major differences between VantageScores and FICO Score are outlined in the table below. These include the amount of time you have to shop for a loan, the number of categories factored into score calculation, differences in weighted categories, and length of credit history.

	FICO	VantageScore
Shopping Window	45 days	14 days
Categories	5	6
Weighting	Amounts owed weighted more	Payment history weighted more

Recommended: Do Banks Run Credit Checks for Checking Accounts?

Who Tends To Use VantageScore

Some banks and credit card issuers supply VantageScores to their customers for free. Scores are provided largely for consumer education, meaning to help people understand what factors affect their credit score, rather than lending decisions.

Consumers who want to purchase a credit score will find Equifax and TransUnion both advertise a credit score monitoring service that uses VantageScore 3.0 as their model. If you’re comparing Transunion VantageScore vs. FICO, you’ll see that Experian sells a FICO score 8 model.

Recommended: What is The Difference Between Transunion and Equifax?

Who Tends To Use FICO

FICO claims that 90% of top lenders use FICO Score to make lending decisions. Consumers who visit the Experian website will see the credit score monitoring service it offers uses the FICO Score 8 model. You can also purchase your FICO Score directly from FICO.

FICO and VantageScore credit scores are used by a variety of sources to consider your credit history and credit score. These can include lenders, landlords, employers, and insurance companies. (Read more about how credit checks for employment work.)

It’s also possible to get a tri merge credit report, which combines data from the three credit bureaus in one report.

Which Credit Score Costs the Least To Check?

Many people don’t know how to find out their credit score for free. While you are entitled to a free credit report each year from AnnualCreditReport.com, that report won’t include a credit score.

Here are some ways you can find your credit score without having to pay for it:

1.    Bank or credit union. Many financial institutions provide credit scores to their members. The score is often found by accessing online accounts.

2.    Credit card issuer. Many credit card issuers provide credit scores to their customers.

3.    Finance apps. Some money tracker apps and similar businesses provide credit scores to their users.

By the way, pulling your credit report and checking your own score don’t negatively affect your credit score. Learn more about soft credit inquiries vs. hard credit inquiries.

The Takeaway

The two main credit score companies are FICO Score and VantageScore. Each company calculates your score in a slightly different way. Checking your credit is a great way to stay on top of your financial health. Although you may not know exactly which credit score your lender uses to make decisions, you can get a pretty good idea of your range. A number of businesses can provide your credit score free of charge, including banks and credit unions, credit card issuers, and finance apps. Obtaining a credit score from either FICO or VantageScore can help you identify your strengths and the areas where you need to improve.

The SoFi app offers free credit monitoring. In addition to tracking your credit score, monitoring can help you manage your credit utilization and better understand the factors that drive your credit score.

If you like free tools to help you manage your finances, consider SoFi.

FAQ

Does TransUnion use FICO or Vantage?

TransUnion uses the VantageScore 3.0 model.

Which is more accurate: VantageScore or FICO?

Both VantageScore and FICO Score are used to make lending decisions, so the score that is most accurate is the one your lender is planning to use. According to FICO, 90% of top lending institutions use their score to make lending decisions.

Which credit score is better: FICO or TransUnion?

TransUnion provides credit scores from the VantageScore 3.0 model. Both FICO and VantageScore can provide insights into a consumer’s behavior with credit.

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*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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.

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.

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Put simply, available credit on a credit card is how much money a cardholder has left to spend in a billing cycle. Being aware of your available credit is key to ensuring you don’t spend beyond your credit limit. Doing so can lead to having a purchase declined or facing penalties, such as a higher interest rate.

Once you know what available credit means, however, you may find that you have further questions. How much available credit should you have? How can you check your available credit? And are there any ways to increase your available credit?

What Is Available Credit on a Credit Card?

Available credit is the amount of money that’s left on a cardholder’s account in the current billing cycle. As a cardholder uses their credit card, the purchase amounts are deducted from their credit limit, which is the maximum amount a cardholder can spend on the card. The remaining amount is what’s known as available credit.

Credit card companies recalculate your available credit every time you make a purchase and when you make a card payment. When you buy something with your credit card, your available payment falls, whereas your available credit rises when you make a payment. One of the key differences between available credit and credit limit is that your credit limit will remain the same, regardless of your spending or payments.

The Importance of Having Available Credit

Knowing your available credit can have a significant impact on your credit card experience. The more available credit you have, the more you can spend on your card. If your available credit is low, you’ll know that you’re nearing your credit limit.

When you aren’t aware of whether you have available credit, the following scenarios can become a reality depending on how your credit card works:

•   You could have a purchase declined if you don’t have the available credit to cover it.

•   You could incur an interest rate penalty, meaning your rate will go up.

•   You could owe an over-limit fee.

•   Your credit card issuer could lower your credit limit, or even close your account after multiple overages.

How to Check Your Available Credit

Cardholders can easily check their available credit in the following ways:

•   On their monthly credit card statement

•   Via the credit card company’s app or website, listed under “accounts”

•   By calling their credit card issuer through the number on the back of their card

Calculating available credit is also fairly straightforward. All a cardholder has to do is subtract their current credit card balance from the account’s total credit limit. In other words, the formula is: credit limit – current balance = available credit.

Make sure to factor in all card-related costs when making this calculation, account fees and interest charges, which will apply if you’re carrying a balance on a credit card.

Recommended: What is a Charge Card?

How Much Available Credit Does It Make Sense to Use?

It’s recommended that credit card users regularly check their credit card balance and refrain from overspending in order to maintain a lower credit utilization rate. This rate reflects how much of their overall credit limit they’re using at a given time.

Credit utilization is not only important for household budget considerations — it also impacts credit score. The lower the credit card utilization rate, the better for a cardholder’s credit score. Aim to maintain a credit-to-debt ratio of no more than 30%, meaning the cardholder has 70% of their available credit remaining on the card account.

Tips for Increasing Your Available Credit

Cardholders looking to boost their available credit can leverage several action steps to get the job done.

Pay Down Your Card Balances

Perhaps the most efficient way to boost your available credit — short of not using the card at all — is to make regular payments. This will keep your credit card debt as low as possible.

For maximum results, pay as much as your household budget allows each month toward your credit card balance rather than only making the minimum payment. Done regularly, this will help to keep your credit card debt down and your available credit up.

Recommended: When Are Credit Card Payments Due?

Request a Credit Limit Increase

Technically, asking for — and getting — a credit limit increase from your credit card company will also boost your available credit. You’ll need good credit and a solid credit card payment history to gain approval from your credit card company though. Also note that the request for a credit limit hike will also lead to a hard credit check, which could negatively impact your credit score.

Once you get approved for a credit limit boost, resist the temptation to overspend now that you have a higher credit limit. To be safe, don’t ask for a credit limit boost unless you’re able to pay off your current balance. That’s a good sign you can handle any potential added credit card debt.

Recommended: What Is the Average Credit Card Limit?

Get a New Credit Card

As long as you’ve done a good job of making timely debt payments and have maintained a stellar credit score, you stand a chance of getting approved for a new credit card with a higher credit limit.

If your new credit card doesn’t offer a higher credit limit, you’ll still benefit from the available credit earned from the new card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Knowing how much available credit you have on a credit card clues you in to how much you still have available to spend. However, you’ll want to avoid using the entirety of your credit limit — meaning whittling your available credit down to $0 — due to the consequences that can have. Not only could that result in a declined credit card or a hiked interest rate, a high credit utilization rate can have implications for your credit score.

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

How much available credit should I have?

A good rule of thumb is to have at least 70% of your credit limit available. That will allow you to maintain a credit utilization rate of 30%, which can help you to avoid negative impacts to your credit score.

What does available credit mean on a credit report?

Available credit on a credit report means the amount of credit available to a consumer relative to their outstanding debt. Lenders and creditors want to see consumers with high available credit and low debt balances, as this shows responsible borrowing habits.

Is available credit the amount I can spend?

Yes, available credit is the amount of credit available to a cardholder that they can use.

Why is my available credit low?

Low available credit means you’ve used a large portion of your credit limit. You might aim to spend less in the future to maintain a lower credit utilization rate. In the meantime, keep a close eye on your spending to avoid hitting your credit limit, which can have negative consequences.

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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.

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 .

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One of the best ways to build credit with a credit card is through responsible use of your card, such as paying off your credit card in full each month and maintaining a low credit utilization rate. This behavior can help build your credit by showing you’re able to meet your debt obligations, which is something potential lenders want to see.

What if you’re interested in using a credit card to build credit, but don’t yet have a credit card? In this case, there are credit cards that are marketed to those with a limited credit history who want to build their credit. Depending on your personal situation, here’s a look at the best way to build credit with a credit card.

Building Credit With a Credit Card

If you’re looking to build up your credit, a credit card can be a great place to start. Getting a credit card may be easier than getting approved for a mortgage or other type of loan. Plus, unlike most other loans, you won’t have to pay any interest with a credit card as long as you pay your statement balance in full each month.

Recommended: How to Avoid Interest On a Credit Card

8 Tips to Build Credit With a Credit Card

Curious how to build credit with a credit card? Here are eight tips to try.

1. Regularly Pay Your Bills on Time

Paying history is one of the biggest factors that makes up your credit score. If you’re focusing on building your credit score, you’ll want to make sure that you pay your bills on-time, each and every month. If your credit report shows a history of late or missed payments, that can really drag down your credit score.

2. Maintain a Low Credit Utilization Rate

Another factor that helps to build credit is maintaining a low credit utilization rate, ideally under 30%. Your credit utilization rate is your total outstanding debt balance divided by your total credit limits expressed as a percentage. You can lower your utilization rate by paying down debt or increasing your total credit limit.

Recommended: What is the Average Credit Card Limit?

3. Pay Your Credit Card in Full

In addition to paying your credit card statement before the due date, it’s also a great idea to pay the full statement balance every month, if possible. This helps lower your credit utilization rate, which is an important factor in determining your credit score. Additionally, it prevents you from paying interest.

If you’re not able to pay your credit card statement in full, make a plan and consider adjusting your financial habits going forward.

Recommended: What is a Charge Card?

4. Become an Authorized User

If you’re not ready or can’t get approved for a credit card in your own name, consider becoming an authorized user on the credit card account of a trusted friend or family member. You’ll receive a secondary card in your name, also known as a supplementary credit card, and you can benefit from the payment history and good credit of the primary account holder. This can help you when you go to get a credit card for the first time on your own.

However, you’ll want to be careful about whose account you become an authorized user on. If they miss payments or pay late, it can affect your credit score negatively.

5. Use Your Card Regularly

It’s not enough to simply have a credit card — you also have to use it. Using your credit card responsibly shows potential lenders that you’re more likely to be responsible with new debt or loan obligations.

Consider using your credit card to pay some of your monthly bills to keep it in regular use. Just make sure that you’re using credit cards wisely by also setting aside money to pay off the statement in full when it comes due.

Recommended: When Are Credit Card Payments Due?

6. Consider a Secured Credit Card

If you’re having trouble getting approved for an unsecured credit card on your own, you might consider a secured credit card. With a secured card, you typically put down a refundable security deposit, which serves as your credit limit.

As you consistently and responsibly use your secured credit card, you can ask your credit card issuer to increase your credit limit and refund your initial security deposit.

Recommended: Tips for Using a Credit Card Responsibly

7. Limit New Credit Applications

Another factor that goes into determining your credit score is how many new credit applications you’ve had recently. Almost every time that you apply for new credit, such as a credit card or a loan, the potential lender will do a hard pull on your credit report. Having too many of these recent credit inquiries on your credit report can have a negative impact on your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

8. Keep Your Credit Accounts Open

If you’ve had trouble in the past with credit card debt, your first thought might be to cut up your credit card and close your account. One reason to keep your credit card accounts open is that another factor that goes into determining your credit score is the average age of your accounts. Keeping an old account open — especially if it comes with no annual fee — can be a good way to build credit.

Alternative Ways to Build Credit

Besides leveraging credit cards, there are a few other ways to build credit.

Get an Auto Loan

If you’re in the market for a new or used car, consider getting an auto loan. Like a credit card, any auto loan balance or payment history that you have will show up on your credit report. Making reliable and on-time payments on your auto loan can be another positive indicator to your credit score.

Take Out a Personal Loan

Besides an auto loan, a personal loan is another type of debt product that typically shows up on your credit report. With a personal loan, you receive money upfront from the lender and then pay it back over time, with interest. Having a history of on-time payments on a personal loan can be another way to build credit.

Get a Cosigner

If you’re not ready to apply for credit in your own name or are having trouble getting approved for a loan or credit card, you might consider a cosigner. A cosigner is a trusted friend or family member who will sign their name to your loan alongside your own. That makes them also financially responsible for the debt as well, so you’ll want to be careful about who you choose to cosign with. However, it can be a helpful step toward establishing credit.

The Takeaway

Using a credit card can be a great way to build credit — as long as you do it responsibly. Make sure to use your credit card in such a way that you can pay off your full statement balance completely, each and every month. Showing responsible payment history over time and keeping your overall credit utilization rate low are two of the biggest factors that make up your credit score.

If you’re ready to build credit by applying for a new credit card, you can consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi Credit Card, you can earn unlimited cash-back rewards if you’re approved. Then, use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

What is the fastest way to build credit with a credit card?

Building credit is usually not something that will happen overnight. Instead, most potential lenders are looking for a history of making on-time payments over time. This can take months or potentially even years to fully build up your credit.

How do you use a credit card to build credit for the first time?

When you get a credit card for the first time, you’ll want to start using the card to pay for some of your monthly expenses. Just make sure to set aside the money for those purchases, so that you can pay your credit card statement in full when it comes at the end of the month. Establishing a history of on-time payments will help you to build your credit, as it shows other potential lenders that you’ll be responsible with your debt obligations.

How long does it take to build credit with a credit card?

Establishing credit is not something that usually happens over a short period of time. Instead, building your credit is something that happens over months, if not years. Demonstrating a history of reliably meeting your debt obligations is one of the biggest factors that makes up your credit score, so always make sure to pay your bills on time and in full, each and every month.

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¹See Rewards Details at SoFi.com/card/rewards.

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, a statement credit, or pay down eligible SoFi debt.

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.

The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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 .

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If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the better choice: a personal line of credit or a home equity line of credit (HELOC).

In this guide we’ll compare these two types of credit lines — both of which function similarly to a credit card but typically have a lower interest rate and a higher credit limit. We’ll also cover some of the pros and cons of using a personal line of credit vs. a HELOC.

What Is a Personal Line of Credit?

A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.

Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.

In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.

You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range from $1,000 to $100,000, and possibly more.

A PLOC is usually unsecured debt, which means you don’t have to use collateral to qualify. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness.

Can a Personal Line of Credit Be Used to Buy a House?

If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit. But it may not be the best tool available.

A traditional mortgage — there are different types of mortgage loans — secured by the home that’s being purchased may have lower overall costs than a personal line of credit.

A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable.

If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. Lenders typically prefer this number to be less than 30%.

💡 Recommended: Personal Loan vs Personal Line of Credit

What Is a HELOC?

A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.

Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.

A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.

💡 Recommended: Learn More About How HELOCs Work

Personal Line of Credit vs HELOC Compared

If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.

Similarities

Here are some ways in which a personal line of credit and a HELOC are alike:

•   Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.

•   Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.

•   Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.

•   Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.

•   Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)

•   For both, you’ll usually need at least a “good” FICO® score (670 and up on the scale from 300 to 850). Your credit score also affects the interest rate you’re offered and credit limit.

Differences

The biggest difference between a HELOC and a personal line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:

•   In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.

•   With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.

•   A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.

Personal Line of Credit vs. Home Equity Line of Credit
	Personal LOC	HELOC
Flexible borrowing and repayment	✓	✓
Convenient access to funds	✓	✓
Annual or monthly maintenance fee	Varies by lender	Varies by lender
Typicaly a Variable interest rate	✓	✓
Secured with collateral		✓
Approval based on creditworthiness	✓	✓
Favorable interest rates	✓*	✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal lines of credit are generally lower than credit card rates.

💡 Recommended: Credit Cards vs Personal Loans

Pros and Cons of HELOCs

A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit.

A HELOC may offer a tax benefit if you itemize and take the mortgage interest deduction. But there are potential downsides, too.

Pros and Cons of HELOCs
Pros	Cons
Flexibility in how much you can borrow and when.	Your home is at risk if you default.
Interest is charged only on the amount borrowed during the draw period	Variable interest rates can make repayment unpredictable and potentially expensive.
Generally lower interest rates than credit cards or unsecured borrowing.	Lenders may require a current home appraisal for approval.
Interest paid is tax deductible if HELOC money is spent to “buy, build, or substantially improve” the property on which the line of credit is based.	A decline in property value could affect the credit limit or result in termination of the HELOC

Pros and Cons of Personal Lines of Credit

Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.

You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.

But there are other factors to be wary of. Here’s a summary.

Pros and Cons of Personal Lines of Credit
Pros	Cons
Flexibility in how much you borrow and when.	Variable interest rates can make repayment unpredictable and potentially expensive.
Interest charges are based only on what you’ve borrowed.	Interest rate may be higher than for a secured loan.
Interest rates are typically lower than credit cards.	Qualification can be more difficult than for secured credit.
You aren’t putting your home or another asset at risk if you default.	Convenience and minimum monthly payments could lead to overspending.

Alternatives to Lines of Credit

As you consider the pros and cons of a HELOC vs. a personal LOC, you also may wish to evaluate some alternative borrowing strategies, including:

Personal Loan

With a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.

Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.

You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.

Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.

Auto Loan

If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.

Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.

Down the road, if you think you can get a better interest rate, you can look into car refinancing.

Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.

Mortgage

A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing.

There are many types of mortgage loans. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.

A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.

Your ability to qualify for the mortgage you want may depend on your creditworthiness, down payment, and value of the home.

Credit Cards

A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. Well, you know. You likely have more than one. Gen X and baby boomers have an average of more than four credit cards per person, Experian has found.

Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.

Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.

If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.

Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.

Student Loans

Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.

But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.

The Takeaway

A HELOC or a personal line of credit can be useful for borrowers whose costs are spread out over time, especially those who don’t want to pay interest from day one on a lump-sum loan that may be more money than they need.

If you’re a homeowner, tap your home equity with a generous HELOC brokered by SoFi. You might find that the rate and terms unlock lots of possibilities.

Check your rate on a SoFi Personal Loan.

FAQ

What is better, a home equity line of credit or a personal line of credit?

If you qualify for both, a HELOC will almost always come with a lower interest rate.

Can I use a HELOC for personal use?

Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.

How many years do you have to pay off a HELOC?

Most HELOCs have a “draw period” of 10 years, followed by a repayment period.

What happens if you don’t use your home equity line of credit?

Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.

How high of a credit score is needed for a line of credit?

Personal lines of credit are usually reserved for borrowers with a credit score of 670 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good DTI or accepts a lower loan limit.

Does a HELOC increase your mortgage payments?

The HELOC is a separate loan from your mortgage. The two payments are not made together.

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Photo credit: iStock/KTStock

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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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.

Here, you’ll take a closer look at this loan product, including:

•   What is a HELOC loan?

•   How does a HELOC loan work?

•   What are the pros and cons of a HELOC?

•   What are alternatives to a HELOC?

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 75% to 85% of your home’s value.

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, typically over 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only, and then face steeper monthly payments during the repayment phase. Carefully review the details when applying for a HELOC to understand what kind of debt you will be taking on.

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. These expenditures have been rising steeply: The number of home-improvement projects grew 17% to almost 135 million and spending ticked up 20% to $624 billion, according to recent American Housing Survey data.

•   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 line or 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 fixed-rate home equity lines of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either.

•   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, in these inflationary times, it might go down in the future. 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.

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 allows 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 into 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.

Recommended: What are the Different Types of Home Equity Loans?

What Is the Process of Applying for a HELOC?

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 85% 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 85% 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 loan (what is called the draw period), you may be required to make minimum payments toward your HELOC. 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 loan rate as of December 15, 2022, was 7.31%.

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 options.

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.

Recommended: Cash Out Refi vs. Home Equity Line of Credit: Key Differences to Know

Home Equity Loan

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.

Some lenders will reduce or waive the closing costs if you don’t pay off the loan within a particular period.

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 their 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.

If a home equity line of credit sounds right for you, see what SoFi offers. We have HELOC options that allow you to access up to 95% or $500,000 of your home’s value at competitively low rates. Plus, 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 85% 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 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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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

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