Does a HELOC Affect Your Credit Score?


When it comes to your credit score, your Home Equity Line of Credit (HELOC) has a lot in common with a credit card. This can have a small impact on your credit score when you apply for one, but a greater impact if payments are late or missed.

How does a HELOC work?

HELOCs are revolving lines of credit that are secured against the equity in your home. Some reasons homeowners take out HELOCs are to use the money to do home renovations, cover unforeseen expenses, or pay off high interest debts such as credit cards. The big advantage of HELOCs is that they have much lower interest rates than plastic. As of May 26, the average rate for a HELOC was 3.99%, compared to 16.09% for credit cards, according to Bankrate.

These loans work the same way as credit cards. During an initial drawdown period which typically lasts 10 years, you are allowed to borrow money from HELOC when you need it, carry a balance month to month, and make minimum payments. During this period, you will generally only be required to make interest payments. After the first 10 years, you will enter the repayment period, which often lasts 20 years. During this time, you will have to pay interest and principal, and you will not be able to make any drawings. Making a late payment or missing a payment can both lower your credit score and put you at risk for the lender to foreclose on the home.

Does a HELOC Affect Your Credit Score?

A HELOC can impact your credit score in a number of ways, from request to repayment. However, some of these effects could be temporary.

How Applying For A HELOC Affects Your Credit

When you apply for a HELOC, potential lenders will check your credit score, which has the potential to temporarily lower your credit score. However, if you haven’t applied for more credit recently, the impact will be minimal, says Jackie Boies, senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counseling organization based. in Texas. “The survey will stay on your credit report for two years, but typically only impacts your credit score for about six months,” Boies says.

“Overall, a single loan application will have minimal impact, typically 5-10 points,” says Suzanne Mink, assistant vice president of consumer loans at Connex Credit Union.

Multiple applications from auto, mortgage, or student lenders in a short period of time do not have a significant impact on your credit score. However, if you decide to compare interest rates and fees over a longer period of time, several serious inquiries could hurt your credit score, says Mink.

How Using a HELOC Affects Your Credit

Once you are approved for a HELOC, the loan secured by your home will be reported as another revolving credit, like a credit card, instead of as a second mortgage.

“A HELOC is an open line of credit and can be used in the same way (like a credit card),” says Boies. “As with any debt, it will be very important to maintain timely payments and develop an excellent payment history on your HELOC.”

Like a credit card, a HELOC is a revolving line of credit, so you can withdraw money from the loan when you need it and only make minimum payments during the drawdown period.

“That’s why a HELOC is listed as a revolving account like your other credit card accounts,” says Mink. “The credit report will show the HELOC balance, credit limit, and payment history.” But unlike a credit card, the amount of available credit used by HELOC is not taken into account when determining your credit score when looking for another loan.

You can, however, increase your credit score by making timely payments for your HELOC.

What happens to your credit score if you don’t use the HELOC very often?

One of the factors that determines your credit score is how much of your total available credit you have used, which is called credit usage. Your credit score may increase if the HELOC is untapped and there is a large amount of credit available, says Leo Loomie, senior vice president of client development at Digital Risk, a provider of technology platforms and services. digital based in New York. “Not drawing on an open line is very similar to having an open credit card and not using it.”

How closing a HELOC affects your credit

Closing a HELOC can impact your credit score, especially if you don’t have a lot of credit available elsewhere.

“Closing a HELOC will reduce its available credit and could have a negative impact if the percentage of revolving balances exceeds a certain percentage,” says Matt Hackett, COO of Equity Now, a New York-based direct mortgage lender. For example, if an owner has a HELOC of $ 10,000 and closes the account after being paid off, that means that the $ 10,000 of available credit is no longer counted towards the owner’s credit score.

The impact on a credit score will be greater if the person has a short credit history, is relatively new to credit, or has few credit cards. “Credit history makes up about 15% of your score,” says Mink. “A longer credit history will help improve your score. Each month you keep the HELOC open extends your credit history.

The bottom line

It’s best to use a HELOC for specific needs, such as paying off high-interest credit cards or repairing your home, says Boies. Using equity to increase the value of your home is smart, especially since the interest you pay on your HELOC will be tax deductible if you use the funds to significantly improve your home. And because HELOCs tend to have lower interest rates than credit cards or personal loans, they can make the best financial sense.

Before applying for a HELOC, make sure you are prepared to deal with the potential impacts on your credit score by taking the following steps:

  • Increase your credit score before you apply: Taking steps to improve your credit score will reduce the impacts of difficult credit applications and help you get the lowest rates.
  • Compare the prices: The best way to find the cheapest loan is to compare the HELOC rates of a few lenders, especially if you can be pre-qualified without a rigorous credit check.
  • Understand how the HELOC draw period works: Make a financial plan for your HELOC drawdown period and repayment period to avoid damaging your credit by missing payments.

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