Does Having a HELOC Affect Your Credit?

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home, allowing you to borrow against your home’s equity as needed. Understanding how a HELOC impacts your credit report and credit score, from application to closure, is important for managing your financial health. Lenders use your credit score to assess your creditworthiness, influencing loan approvals and interest rates.

How Applying for a HELOC Affects Credit

Applying for a HELOC initiates a “hard inquiry” on your credit report. A single hard inquiry usually results in a small, temporary dip in your credit score, often by fewer than five points. The impact is short-lived, with scores often rebounding within a few months.

Opening a new credit account can influence your credit score. It may slightly decrease the average age of your credit accounts. However, a HELOC can also diversify your “credit mix.” A diverse credit mix, including both revolving and installment accounts, can be viewed positively by lenders, though it is a less significant factor than payment history or credit utilization.

Once approved, the new credit limit of the HELOC increases your total available credit. While not an immediate score boost, it can improve your overall credit utilization ratio if managed responsibly. This positive effect on utilization is realized after the account is established.

How Using a HELOC Affects Credit

Active usage of a HELOC directly impacts your credit through your credit utilization ratio. This ratio compares the amount of credit you are using to your total available credit. Drawing a significant amount from your HELOC increases your outstanding balance, which can raise this ratio and potentially lower your credit score. Maintaining a lower utilization, ideally below 30% of your available credit, is considered favorable for your credit score.

Payment history is another significant factor, and consistent, on-time payments on your HELOC are important for maintaining a positive credit score. Lenders report your payment patterns to credit bureaus, and timely payments demonstrate responsible credit management. Conversely, late or missed payments can severely damage your credit scores, with the impact increasing the longer a payment is overdue. Even a single late payment reported after 30 days can negatively affect your score and remain on your report for several years.

A HELOC contributes to your credit mix. Having a combination of different credit types, such as revolving credit and installment loans, can demonstrate your ability to manage various forms of debt. This diversity can be beneficial, particularly if your credit profile previously consisted primarily of one type of credit. While not the most impactful factor, it contributes to a well-rounded credit profile.

Your Debt-to-Income (DTI) ratio is also affected by HELOC usage, although it is not a direct factor in your credit score. DTI is the percentage of your gross monthly income that goes toward debt payments. When you draw on your HELOC, it adds to your monthly debt obligations, which can increase your DTI. A higher DTI can impact your ability to qualify for additional loans or lines of credit in the future, as lenders use this ratio to assess your capacity to take on more debt.

How Repaying and Closing a HELOC Affects Credit

During the repayment phase of a HELOC, continuing to make consistent, on-time payments reinforces a positive payment history. This ongoing demonstration of responsible debt management helps to build and maintain a strong credit score. As the outstanding balance on the HELOC is paid down, your credit utilization ratio improves. A lower balance relative to the credit limit can positively impact your credit score.

Closing a HELOC can have several implications for your credit profile. While a closed account with a positive payment history typically remains on your credit report for up to 10 years, its closure can affect the average age of your credit accounts. If the HELOC was one of your older accounts, closing it might slightly reduce your overall average credit history length, which could cause a minor dip in your score.

The closure also impacts your total available credit, which can influence your credit utilization. If the HELOC represented a significant portion of your available credit, closing it reduces that total. This reduction could potentially increase your overall credit utilization ratio if you carry balances on other credit accounts, which might negatively affect your credit score. Additionally, removing a secured, revolving credit type from your portfolio might have a minor effect on your credit mix, depending on your other active accounts.