Does a HELOC Affect Your Credit Score?

A credit score is a three-digit number, usually ranging from 300 to 850, that helps lenders assess the likelihood of an individual repaying borrowed money on time. A higher score generally indicates lower risk to lenders and can lead to more favorable loan terms, such as lower interest rates. Lenders utilize these scores when evaluating applications for various credit products, including mortgages, auto loans, and credit cards.

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity they have built in their homes. It functions as a revolving line of credit, similar to a credit card, where you can draw funds as needed up to a set limit. The home itself serves as collateral for the HELOC, which often results in lower interest rates compared to unsecured loans. Borrowers typically have a “draw period,” usually 5 to 10 years, during which they can access funds, followed by a “repayment period,” often 10 to 20 years, where they repay the principal and interest.

Understanding Credit Score Components

Credit scores are calculated using several factors, each contributing a different weight to the overall score. Payment history is the most influential factor, typically accounting for about 35% of a FICO Score. This category reflects whether past credit accounts have been paid on time, with late payments, collections, or bankruptcies negatively impacting the score.

The amounts owed, also known as credit utilization, makes up approximately 30% of the FICO Score. This factor considers the total amount of credit and loans being used relative to the total available credit. A lower credit utilization rate, ideally below 30%, is generally seen as more favorable by lenders.

The length of credit history contributes around 15% to the FICO Score. This includes the age of accounts. A longer credit history typically indicates more experience managing credit, which can positively influence the score.

New credit accounts for about 10% of the FICO Score, considering the frequency of inquiries and recently opened accounts. Opening several new accounts in a short period can suggest higher risk to lenders, especially for those with limited credit histories. The final 10% is attributed to credit mix, which assesses the diversity of credit types, such as credit cards, installment loans, and mortgages.

How a HELOC Application Affects Your Score

Applying for a HELOC typically triggers a “hard inquiry” on your credit report. This occurs when a lender reviews your credit file for a loan application and can cause a small, temporary decrease in your credit score, usually by fewer than five points.

The impact of a hard inquiry is generally minimal and short-lived, with the score often rebounding within a few months. A hard inquiry remains on your credit report for up to two years, but its direct effect on your score typically lasts around 12 months. Multiple hard inquiries in a short timeframe, particularly for credit cards, can have a more significant negative impact, as they might suggest an increased reliance on new credit.

However, for certain types of loans, such as mortgages, which include HELOCs, multiple inquiries within a specific shopping period are often treated as a single inquiry by credit scoring models. This period can range from 14 to 45 days, depending on the scoring model used.

How an Open HELOC Affects Your Score

Once a HELOC is open, its ongoing impact on your credit score depends significantly on how it is managed. Payment history is directly affected by your HELOC payments. Consistently making on-time payments, even if they are only interest-only payments during the draw period, can positively contribute to your credit history and improve your score over time. Conversely, missing payments by 30 days or more can significantly damage your credit score.

Credit utilization is another important factor that can be influenced by an open HELOC. While FICO Scores generally exclude HELOCs from revolving credit utilization calculations because they are secured by real property, other scoring models, like VantageScore, may include them. If a HELOC is included in utilization calculations, keeping the drawn amount low relative to the available credit limit can help maintain a healthy credit utilization ratio. Using HELOC funds to pay off high-interest, unsecured debts like credit card balances can also potentially lower your overall credit utilization ratio on those accounts, thereby improving your score.

A HELOC also contributes to the length of your credit history and your credit mix. Opening a new HELOC initially lowers the average age of your accounts, which can cause a slight, temporary dip in your score. However, because HELOCs often have long terms, keeping the account open and active over many years can eventually increase the average age of your credit accounts, leading to a positive long-term effect. The addition of a HELOC diversifies your credit mix by adding a revolving line of credit secured by real estate.

Strategies for Managing HELOC Credit Impact

Proactively managing your HELOC can help maintain or improve your credit score. Making all payments on time is important. Setting up automatic payments or calendar reminders can help ensure you never miss a due date.

Maintaining a low credit utilization is also advisable, especially if your HELOC is factored into this calculation by the scoring model. Even if it is not, avoiding maxing out your credit line can prevent potential financial strain and demonstrate responsible borrowing. If you have high-interest credit card debt, strategically using a HELOC to consolidate and pay off those balances can reduce your overall interest costs and potentially improve your credit utilization on unsecured accounts.

Understanding the draw period and repayment phases of your HELOC is important for managing your budget and avoiding unexpected payment increases. While interest-only payments may be permitted during the draw period, making principal payments when possible can reduce your outstanding balance and future interest charges. Regularly monitoring your credit reports for accuracy can help you identify any discrepancies and understand how your HELOC is impacting your credit profile.