Does a HELOC Affect Credit Score?

Key Takeaways

• Yes, a HELOC affects your credit score in a few ways. 
• A HELOC can both positively and negatively affect your credit score. 
• There are steps you can take to prevent a HELOC from negatively impacting your credit score.
• Careful management and usage of your HELOC may help you improve your credit score.

Home equity lines of credit (HELOCs) are financial products that can be used to tap into your home equity. Like a mortgage, HELOCs use your home as collateral. There are several ways you can use and benefit from a HELOC. Before moving forward, it’s important to understand how you can use a HELOC to your credit score’s advantage as well as how it can be detrimental. 

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How Does a HELOC Affect Your Credit Score?

A HELOC can affect your credit score in a few ways. First, when you apply for a HELOC, the hard credit pull that the lender performs can temporarily impact your credit score. Then, when you enter the repayment period, your credit score can be negatively impacted if you don’t make your payments on time. However, your HELOC can also positively impact your credit score because it shows variety in your credit history. This is looked upon favorably by the credit bureaus.  

When Applying for a HELOC

First, when you apply for a HELOC, the hard credit pull that the lender performs can temporarily impact your credit score. You may see that your credit score drops a few points initially, but this typically does not make a major difference long term. 

When Using a HELOC

A HELOC is a unique product, especially with how it affects your credit score. The balance of most revolving lines of credit — like credit cards — figures into your credit utilization ratio. A HELOC’s balance does not figure into the ratio because it is secured by your home as collateral. 

That being said, credit bureaus will want to see that you are utilizing the HELOC by tapping into it regularly. Some people use a HELOC to pay off credit card balances to help lower their credit utilization ratio, which can improve your credit score. 

When Closing a HELOC

HELOCs provide the opportunity to add variety to your credit history and increase the total amount of credit that you have available. When you close a HELOC, it reduces your total available credit and can cause a spike in your credit utilization ratio.

Ways to Avoid a HELOC From Harming Your Credit Score

HELOCs can have positive and negative impacts on your credit score. Fortunately, there are a few things you can do to minimize any damage to your credit score from a HELOC.

Make Timely Payments

A strong payment history is a large factor that makes up your credit score. By making your payments on time throughout the repayment period of your HELOC, you can continue to build a positive payment history. 

Avoid Applying for Multiple New Credit Lines at Once

Applying for one new line of credit every couple of years typically doesn’t cause much damage to your credit score. However, if you apply for multiple lines of credit within a few months, this can start to cause a more significant impact. To avoid this, compare HELOC lenders and only apply for the HELOC you selected. You should also try not to apply for other lines of credit within the months before or after submitting your HELOC application.

Keep Credit Utilization Low

Keep an eye on your credit utilization. The HELOC itself will not impact your credit utilization, but you can use the funds from the HELOC to lower the ratio. 

Monitor Credit Report Regularly

A good rule of thumb is to monitor your credit report regularly — at least once every three months or so. You can get a free report online. Look for any suspicious activity, such as hard credit inquiries that you did not authorize or missing payments. If you notice anything unusual on your credit report, alert the credit bureaus.

Compare the Best HELOC Providers From Benzinga’s Top Providers

There are several HELOC providers to choose from. It’s important to consider your options and see which provider provides the product and terms that best meet your needs.

Is Getting a HELOC a Good Idea?

There are many reasons why you might consider applying for a HELOC. For example, you may want to tap into your home equity to fund home renovations or pay off other debts. However, it’s important to understand the possible consequences and how to properly manage a HELOC. Before you accept a HELOC, make sure you understand how a HELOC affects your credit score as well as your financial situation to set yourself up for success.

Frequently Asked Questions