A HELOC will only impact your credit score if the information is shared with credit agencies. Here’s what you need to know.
Home equity lines of credit (HELOCs) are financial products that can be used to tap into your home equity for expenses such as renovations. Before applying for one, you might ask: “Does a HELOC affect credit score?” After all, most lenders will only issue one to those with a FICO score of 680 or higher.
The short answer is that it depends on where you get the HELOC. “Not all lenders report HELOCs to the credit agency, so it is worth asking as you are applying,” says Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage.
In this post, we’ll discuss how HELOCs affect your credit score and provide expert tips on how to maintain your creditworthiness while using this line of credit.
What is a HELOC?
Home equity lines of credit (HELOCs) are a type of loan that allows you to tap into your home’s equity to access funds for renovations, make a down payment or cover personal expenses. Unlike traditional loans, HELOCs work more like a credit card that you can withdraw from when needed.
A HELOC loan has two phases: the draw and repayment periods. During the HELOC draw period, you can access funds as needed. This typically lasts about 10 years and is followed by the repayment period, which is when you have to repay the borrowed money.
How a HELOC Affects Credit Score
A HELOC can affect your credit score in a few ways. Here, we’ll review how applying for, using and closing a HELOC impacts your credit rating.
How Applying for a HELOC Affects Your Credit Score
As with any loan, lenders will perform a credit check before issuing a HELOC. DeFlorio says the type of credit check depends on the lender.
“Some will use a soft credit report in order to make the credit decision, which has no impact, whereas others will use a hard pull, which counts as an inquiry and can have an impact on your score depending on how many other times you have had your credit run recently,” DeFlorio says.
If your lender does a hard credit pull, you may see your credit score drop a few points initially, but this typically does not make a major long-term difference.
How Using a HELOC Affects Your Credit Score
While most lenders share HELOC data with credit agencies, DeFlorio says some don’t. In this case, non-payments or late payments might not impact your credit rating, but the lender may still issue penalties or fines.
If your data is being shared, delinquent payments will harm your credit score.
Unlike other loans or revolving lines of credit, such as credit cards, having a HELOC in and of itself won’t necessarily affect your creditworthiness. A HELOC’s balance does not figure into your credit utilization ratio because your home secures it as collateral.
That being said, credit bureaus may want to see that you are utilizing the HELOC by tapping into it regularly. Some people use a HELOC to pay off credit card debt to help lower their credit utilization ratio, which can improve their overall credit score.
How Closing a HELOC Affects Your Credit Score
HELOCs allow you to add variety to your credit history and increase the total amount of credit you have available. Closing a HELOC 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 major factor in your credit score. By making your payments on time throughout the HELOC repayment period, 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 avoid applying 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. You can get a free report online. Look for suspicious activity, such as hard credit inquiries you did not authorize or missing payments. If you notice anything unusual on your credit report, alert the credit bureaus.
Bottom Line
The next time you’re wondering “Does a HELOC affect credit score,” here are a few things to keep in mind.
- Some lenders don’t report HELOC data to credit agencies, so be sure to ask as you shop around
- The credit check may be a hard or soft pull, depending on where you go
- Late or non-payments can hurt your credit score if the information is being shared
- HELOCs do not affect your overall credit utilization ratio since it uses your house as collateral
- You can use a HELOC to help lower your credit utilization ratio by paying off other debts
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage, a Northeast-based mortgage lender and broker.
Frequently Asked Questions
Does using a HELOC hurt your credit?
Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage, says it depends on whether the lender reports the HELOC to the credit agencies. If they do, late or non-payments will hurt your credit like any other loan type. However, HELOCs do not impact your overall credit utilization ratio.
Are there downsides to a HELOC?
Yes, the downsides to a HELOC include:
- Your house being used as collateral
- Potential for mismanagement of funds
- Closing costs
What FICO score is used for a HELOC?
Applying for a HELOC can temporarily lower your credit score a few points, but there are several steps you can take to prevent it from lowering your credit score significantly.
Sources
- Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.