Your credit score affects all elements of financing, from loan approval to the interest rate you receive. It can even influence other aspects of your life, such as car insurance premiums and employment opportunities.
So, if you’re thinking about taking out a home equity line of credit (HELOC), you may be wondering what, if any, impact it will have on your credit score.
Before we dive in deeper, let’s get the big question out of the way:
Does a HELOC affect your credit score? Yes, opening a HELOC will impact your credit, but so can the way you use it. Even closing your HELOC could cause your score to fluctuate.
- You may notice a slight dip in your credit score when you first open a HELOC, but it will likely be a minor and temporary decrease.
- Using your HELOC to consolidate credit card debt can lower your credit utilization ratio, which in turn could help your score.
- Your payment history is the most significant component of your credit score, and on-time HELOC payments will likely improve your score over the long run.
Can Applying for a HELOC Impact Your Credit?
Yes, applying for a HELOC can impact your credit score, although the initial impact is relatively minor.
When you apply for a home equity line of credit – or any other loan for that matter – the lender will typically conduct a credit check as part of the application process.
This credit check, commonly referred to as a “hard inquiry” or “hard pull,” is recorded on your credit report for a period of two years. However, it only affects your credit score for 12 months and generally lowers it by around just five points.
Planning to shop around with multiple lenders to get the best deal possible on your line of credit? Multiple credit checks won’t further impact your score, provided they are conducted within the proper timeframe. FICO combines mortgage hard pulls completed within 45 days as a single inquiry. That period is shortened to 14 days when it comes to your VantageScore, which is your combined credit score between the three major credit bureaus.
Most mortgage lenders use FICO scores for home lending purposes, according to the credit bureau Experian. However, it’s possible that your HELOC lender will use VantageScore, another credit scoring model.
Note: Lenders typically only conduct a hard pull on your credit once you’ve formally applied for a HELOC. They can often prequalify you for a loan with what’s referred to as a “soft inquiry,” which does not affect your score.
HELOCs and the Length of Your Credit History
Another negative impact of applying for a HELOC is that it may affect the length of your credit history.
Your length of credit history accounts for 15% of your overall FICO score and factors in:
- How long you’ve had your oldest account
- How long you’ve had your newest account
- The average age of all of your accounts
By opening a HELOC, you’re resetting the age of your newest account and lowering the average age of all accounts. While this probably won’t tank your score, you’re likely to see another slight short-term dip.
How a HELOC Can Improve Your Credit
Despite the potential for a small drop when applying for – and opening – a home equity line of credit, a HELOC can have a positive impact on your score in multiple ways.
Let’s take a look at the three most prominent.
Builds Payment History
Making payments on your HELOC helps to build your payment history, which is the single most important factor when calculating your credit score. The logic is simple: the more on-time payments you have, the more likely you are to repay future debts reliably.
Diversifies Credit Mix
Your credit score is also influenced by your credit mix, which is a snapshot of all the different types of credit accounts you maintain. Having a diverse credit mix shows that you’re responsible for a variety of different credit lines, which can include:
- Credit cards
- Personal loans
- Auto loans
- Standard (installment) mortgages
- Home equity lines of credit
May Improve Your Credit Utilization Ratio
Your credit utilization ratio is the percentage of all available credit that you’re currently using. For example, if you have credit cards with a combined limit of $40,000 and are currently carrying a $10,000 balance, your credit utilization ratio would be 25%.
While single-digit ratios are ideal, experts generally recommend maintaining a credit utilization ratio below 30%.
Since your HELOC is a secured loan tied to real estate, FICO does not count your line of credit towards your credit utilization ratio. VantageScore does, however, according to Experian. Since HELOCs tend to be larger than the limits on credit cards, maintaining a low balance on your HELOC could help improve your VantageScore.
Keep in mind, though, that since your HELOC does not affect the credit utilization ratio as calculated by FICO, homeowners may be able to benefit by using their line of credit to consolidate high-interest credit card debt that does affect it.
How Closing a HELOC Affects Your Credit Score
Closing a HELOC can also affect your credit score:
- If you’ve had your HELOC for several years, closing the line of credit could negatively impact the average length of your credit history, especially if it’s one of your older tradelines.
- It can decrease the diversification of your credit mix, which, although a minor contributing factor, may lower your score.
- While FICO doesn’t count your HELOC towards your credit utilization ratio, Vantage does, meaning that your VantageScore could suffer from reducing the total amount of credit you have available.
HELOCs and the Components of Your FICO Score
Now that we’ve covered how opening, maintaining, and closing a HELOC can affect your credit, let’s break down the various factors that FICO uses to determine your score and how a HELOC may impact each.
Payment History (35%)
Making timely payments on your HELOC can help improve your payment history. Conversely, failing to make your HELOC payments – even during the interest-only draw period – can negatively affect your credit.
Amounts Owed (30%)
Amounts owed takes into account your credit utilization, which isn’t affected by a home equity line of credit in regard to your FICO score. However, this factor also considers your total balance owed across all accounts, the number of accounts with active balances, and, for HELOCs recorded as installment loans, the amount of your original balance that you still owe.
Length of Credit History (15%)
Having a lengthy credit history equates to a higher credit score, and opening a new HELOC can lower both the age of your newest account and your overall average account age. Similarly, closing a long-held HELOC could shorten the average credit history for many borrowers.
Credit Mix (10%)
Maintaining a variety of different types of tradelines, such as credit cards, auto loans, installment home loans, and HELOCs, can help improve your score. By opening a HELOC, you’re likely to enhance the diversity of your credit mix. On the same note, closing your HELOC can reduce diversification and have a negative impact.
New Credit (10%)
New credit looks at how many lender inquiries you’ve had within the past year and the number of new accounts you’ve opened recently. By applying for and taking out a HELOC on your home, you will likely experience a slight decrease in the new credit portion of your credit score.
Frequently Asked Questions About HELOCs and Credit Scores
Looking for more information about how a HELOC could affect your credit score? Here are answers to some of the most commonly asked questions.
Does an Unused HELOC Affect Credit?
Having an unused HELOC won’t significantly impact your FICO score any more than if you were using it, but it could help improve your VantageScore. Since Vantage considers your line of credit when calculating your utilization ratio, having an unused HELOC can help offset other credit balances and keep your overall utilization ratio low.
Can I get a HELOC With Bad Credit?
Getting a HELOC with bad credit can be challenging. Still, it’s not impossible – especially if you have other compensating factors such as substantial equity in your home and a low debt-to-income ratio.
In most cases, lenders will require you to have a credit score of at least 680 to open a HELOC, although some mortgage companies may have lower – or higher – requirements. However, even with a score above the minimum, negative items on your credit report, such as bankruptcies, foreclosures, and charge-offs, could still potentially prevent you from qualifying.
Does a Home Equity Loan Affect Your Credit?
While a HELOC gives you access to a line of credit tied to your home’s equity, a home equity loan is a type of installment mortgage that provides you with an upfront lump sum of cash.
When it comes to your credit, a home equity loan – sometimes referred to as a HELoan – will have much of the same impact as a HELOC, apart from the fact that it won’t affect your credit utilization.
However, if you’re using the funds from your home equity loan to pay off other debts, such as high-interest credit cards that are impacting your utilization ratio, you may see an improvement in your score.
Will a HELOC Help Your Credit Score?
In short, a HELOC can affect your credit score. Still, as long as you use it responsibly and make your required payments, the benefits are likely to outweigh the negatives. This is especially true as your loan ages and you’ve established a healthy payment history.
Homeowners who use their HELOC to consolidate other revolving debts may even see their credit scores improve dramatically, as a low credit utilization ratio is a key factor in maintaining a healthy credit score.
If you’re ready to access your home’s built-up equity and want to discover how large a line of credit you qualify for, apply for a HELOC with Refi.com today.
