How Does a HELOC Affect Your Credit Score?

A Home Equity Line of Credit, or HELOC, is a revolving line of credit that allows homeowners to borrow against the equity in their home. This financial tool functions similarly to a credit card, providing access to funds up to a set limit, with the home serving as collateral for the loan. As funds are repaid, the available credit is replenished, allowing for repeated borrowing during a specific draw period. This article will explore the various ways a HELOC can influence an individual’s credit score, from the initial application to its ongoing use and eventual closure.

Initial Credit Score Changes

Applying for and opening a HELOC can lead to immediate, albeit often temporary, changes in a credit score. A hard inquiry is typically performed by lenders to assess creditworthiness when an application is submitted. This inquiry appears on a credit report and can cause a small, temporary dip in a credit score, usually by a few points, though its impact generally lessens over time and typically remains on the credit report for up to two years.

When a new HELOC account is opened, it becomes a new entry on the credit report, which can initially affect the average age of all credit accounts. If the HELOC is one of the newest accounts, it can slightly lower the overall average age, which is a factor in credit scoring models. However, this effect is usually minor and diminishes as the account ages.

The addition of a HELOC also diversifies an individual’s credit mix, introducing a new type of credit. Credit scoring models consider a healthy mix of credit accounts, such as installment loans and revolving credit, as a positive indicator of financial management. While the initial impact of adding a new account might cause a small fluctuation, the long-term presence of a HELOC can contribute positively to the credit mix, provided it is managed responsibly.

Credit Score Changes During Use

The ongoing management and utilization of an active HELOC significantly influence a credit score. Timely payment history is the most substantial factor in credit scoring, accounting for a significant portion of the score. Consistently making payments on time for the HELOC demonstrates responsible borrowing behavior and can steadily improve a credit score over time. Conversely, late or missed payments can severely damage a credit score, with a single missed payment potentially causing a substantial drop, and these negative marks can remain on a credit report for up to seven years.

Credit utilization, which is the amount of credit used compared to the total available credit, also plays a considerable role in credit scoring. For a HELOC, this means the outstanding balance relative to the approved credit limit. Maintaining a low utilization rate, generally considered to be below 30% of the available credit, is beneficial for a credit score. High utilization, however, signals increased risk to lenders and can negatively impact the score.

Drawing large sums from the HELOC can rapidly increase the utilization rate, potentially lowering the credit score. Even if payments are made on time, a high balance relative to the limit can be detrimental. As the HELOC account ages, it contributes positively to the length of an individual’s credit history, which is another factor in credit scoring. A longer history of responsible credit management, including an aging HELOC, tends to bolster a credit score.

Credit Score Changes After Closing

Closing a HELOC account can have varied impacts on an individual’s credit score, primarily affecting credit utilization and the average age of accounts. When a HELOC is closed, the available credit from that line is removed from the total pool of available credit across all accounts. If other credit lines are heavily utilized or remain unchanged, the overall credit utilization ratio can increase, potentially leading to a decrease in the credit score. This is because the same amount of debt is now spread across a smaller amount of total available credit.

Closing an older HELOC account can also reduce the average age of all credit accounts. If the HELOC was one of the oldest credit lines on a report, its closure might lower the overall average, which can negatively affect the credit score, as a longer credit history is generally viewed favorably by credit scoring models. However, this impact is often less significant than changes in utilization, especially if an individual has several other long-standing accounts.

While closing a revolving credit account like a HELOC alters the credit mix, this factor typically has a less pronounced effect on the credit score compared to utilization or account age. A closed account with a positive payment history can remain on credit reports for a considerable period, often up to 10 years, continuing to contribute to the credit history during that time. This allows the positive payment history to still factor into credit calculations for several years after the account is closed.

Credit Score Changes During Use

The ongoing management and utilization of an active HELOC significantly influence a credit score. Timely payment history is the most substantial factor in credit scoring, accounting for a significant portion of the score. Consistently making payments on time for the HELOC demonstrates responsible borrowing behavior and can steadily improve a credit score over time. Conversely, late or missed payments can severely damage a credit score, with a single missed payment potentially causing a substantial drop, and these negative marks can remain on a credit report for up to seven years.

Credit utilization, which is the amount of credit used compared to the total available credit, also plays a considerable role in credit scoring. For a HELOC, this means the outstanding balance relative to the approved credit limit. Maintaining a low utilization rate, generally considered to be below 30% of the available credit, is beneficial for a credit score. High utilization, however, signals increased risk to lenders and can negatively impact the score.

Drawing large sums from the HELOC can rapidly increase the utilization rate, potentially lowering the credit score. Even if payments are made on time, a high balance relative to the limit can be detrimental. As the HELOC account ages, it contributes positively to the length of an individual’s credit history, which is another factor in credit scoring. A longer history of responsible credit management, including an aging HELOC, tends to bolster a credit score.

Credit Score Changes After Closing

Closing a HELOC account can have varied impacts on an individual’s credit score, primarily affecting credit utilization and the average age of accounts. When a HELOC is closed, the available credit from that line is removed from the total pool, which can potentially increase the overall credit utilization ratio if other credit lines remain unchanged or are heavily used. This is because the same amount of debt is now spread across a smaller amount of total available credit, which can negatively impact the credit score.

Closing an older HELOC account can also reduce the average age of all credit accounts. If the HELOC was one of the oldest credit lines on a report, its closure might lower the overall average, which can negatively affect the credit score, as a longer credit history is generally viewed favorably by credit scoring models. However, this impact is often less significant than changes in utilization, especially if an individual has several other long-standing accounts.

While closing a revolving credit account like a HELOC alters the credit mix, this factor typically has a less pronounced effect on the credit score compared to utilization or age of accounts. A closed account with a positive payment history can remain on credit reports for a considerable period, often up to 10 years, continuing to contribute to the credit history during that time. This allows the positive payment history to still factor into credit calculations for several years after the account is closed.