Does a Home Equity Line of Credit Affect Your Credit Score?

A Home Equity Line of Credit (HELOC) functions as a revolving line of credit, allowing homeowners to borrow against their home equity. Similar to a credit card, you can draw money, repay it, and borrow again during a specified “draw period,” typically lasting around 10 years. After this, a “repayment period” begins where the outstanding balance is paid back.

Initial Credit Score Changes When Opening a HELOC

When you apply for a HELOC, lenders conduct a “hard inquiry” on your credit report. This can cause a small, temporary dip in your credit score, typically by five points or less. While the inquiry remains for up to two years, its impact usually lessens after a few months and generally only affects the score for about 12 months.

Opening any new credit account, including a HELOC, also affects the average age of your credit accounts. Your credit history length is a factor in credit scoring models, accounting for approximately 15% of your FICO Score. A new account can lower this average, potentially leading to a slight decrease in your score initially. However, the impact of a new account on average age is generally less significant than other credit factors, and this effect diminishes over time as the HELOC account ages.

Adding a HELOC can diversify your credit mix, which is viewed favorably by credit scoring models. Credit mix refers to the different types of credit accounts you manage, such as revolving credit (like credit cards and HELOCs) and installment loans (like mortgages or auto loans). A diverse mix demonstrates your ability to handle various forms of debt responsibly and can account for about 10% of your FICO score. While the immediate impact of a new account might be a small adjustment, the long-term benefit of a diversified credit portfolio can be positive.

Ongoing Influence of HELOC Use on Credit Scores

The ongoing management of a HELOC influences your credit score, primarily through payment history and, in some cases, credit utilization. Consistently making on-time payments is the primary factor, accounting for approximately 35% of your FICO score. Timely payments on your HELOC demonstrate responsible credit behavior and improve your score. Conversely, late or missed payments can severely damage your credit score.

A payment reported as 30 days or more past due can impact your score and remains on your credit report for up to seven years from the original delinquency date. Even if the past-due balance is eventually paid, the record of the late payment persists. While HELOCs are revolving lines of credit, unlike unsecured credit cards, they are secured by your home. FICO credit scoring models typically exclude HELOC balances from the credit utilization ratio calculation for revolving credit.

However, some other scoring models, such as VantageScore, may factor HELOC balances into credit utilization. For other revolving accounts, like credit cards, keeping your credit utilization ratio low is advised, typically below 30% of your available credit. If you use your HELOC to pay off high-interest, unsecured debts like credit card balances, it can indirectly improve your credit utilization ratio on those credit cards, boosting your score.

Optimizing HELOC Use for Credit Scores

Responsible management of a HELOC contributes positively to your credit profile over time. A primary strategy is consistently making all payments on time. Setting up automatic payments helps ensure you never miss a due date, as payment history is a major component of your credit score. Even during the draw period, when interest-only payments might be permitted, paying more than the minimum can reduce your principal balance and free up available credit.

While HELOC utilization does not directly impact the credit utilization ratio for FICO scores, borrow only what is necessary and repayable. High balances, even on a secured line, indicate increased debt. If you use HELOC funds to consolidate other high-interest debt, ensure you maintain low utilization on your remaining unsecured revolving accounts, aiming for under 30% of their credit limits. This approach improves your overall credit utilization.

Regularly monitoring your credit report is important to identify any inaccuracies or unauthorized activity that could negatively affect your score. Understanding how your HELOC is reported by the lender to credit bureaus provides insights into its impact. By adhering to these practices, a HELOC can be a valuable financial tool that, when managed prudently, supports a healthy credit score.