Does a HELOC Hurt Your Credit Score?

A Home Equity Line of Credit, commonly known as a HELOC, is a financial product that allows homeowners to borrow against the equity they have built in their property. It functions much like a revolving credit line, similar to a credit card, where you can withdraw funds as needed up to a set limit, repay them, and then borrow again. A credit score is a numerical representation of an individual’s creditworthiness, indicating the likelihood of repaying borrowed money. Understanding how a HELOC interacts with this score is important for responsible financial management.

Impact of Application and Opening

When you apply for a HELOC, lenders perform a “hard inquiry” on your credit report. This can cause a small, temporary dip in your credit score, usually by fewer than five points. While the impact is generally minimal and short-lived, it remains on your credit report for up to two years, though its effect on your score diminishes after 12 months.

The addition of a new credit account, such as a HELOC, can initially affect the “average age of accounts.” Credit scoring models consider the length of your credit history, and a new account reduces the overall average age of your credit lines. This can lead to a slight, temporary decrease in your score. However, this effect is brief, and your score can rebound within a few months with responsible management.

Conversely, opening a HELOC can also have an immediate positive effect on your credit utilization ratio, provided you do not immediately draw heavily from the line. By increasing your total available credit limit, your overall credit utilization—the amount of credit you are using compared to your total available credit—can decrease. A lower utilization ratio is viewed favorably by credit scoring models, offering an initial boost to your score.

Impact of Managing the HELOC

Once a HELOC is open, how you manage it influences your credit score. Payment history is the primary factor in credit scoring models, often accounting for 35% to 40% of your score. Consistently making on-time payments on your HELOC demonstrates responsible credit behavior and improves your credit score over time.

Conversely, late or missed payments can damage your credit score. A single payment reported 30 days or more past its due date can lead to a drop in your score. The longer a payment is delayed, or the more frequently payments are missed, the more substantial the negative impact on your creditworthiness. Since a HELOC is secured by your home, defaulting on payments carries the risk of foreclosure, which would have a severe and lasting effect on your credit report.

Credit utilization, or the “amounts owed,” is another important factor, typically accounting for about 30% of your credit score. While some credit scoring models may not factor HELOC balances into revolving credit utilization calculations, others might. If your HELOC balance is considered in utilization, drawing a large portion of your available credit could negatively impact your score. Therefore, keeping your HELOC balance low relative to its limit is beneficial for your score.

How HELOCs Interact with Credit Score Components

The “credit mix” component assesses the diversity of credit types on your report, such as revolving accounts like credit cards and installment loans like mortgages. A HELOC can be reported as either a revolving account or an installment loan, depending on the lender. Adding a HELOC can diversify your credit portfolio, which is viewed positively by scoring models, especially if it introduces a new type of credit you didn’t previously have.

The “length of credit history” is another factor, representing the age of your oldest account and the average age of all your accounts. While opening a new HELOC initially lowers the average age of your accounts, keeping the HELOC open and managing it responsibly over an extended period can eventually contribute positively to this component. Accounts that remain open in good standing for many years can demonstrate a long history of responsible credit use, which is favorable for your score.

A HELOC directly impacts the “amounts owed” category through its balance. The outstanding balance on your HELOC contributes to your total debt, which lenders consider when evaluating your overall financial risk. Carrying a large balance on your HELOC, even if secured by your home, signals higher indebtedness. This can influence your score, particularly if it contributes to a high overall debt burden across all your credit accounts.