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Does a HELOC Affect Your Credit Score?
By Joan Pabón MONEY RESEARCH COLLECTIVE
Home equity lines of credit (HELOCs) are revolving sources of funds that work similarly to credit cards. They allow homeowners to borrow as needed from their accounts and repay the money afterward. But there are some crucial differences between HELOCs and credit cards, including how using each one affects your credit record.
Table of contents
- What is a HELOC and how does it work?
- How does a HELOC affect your credit?
- HELOCs and credit scores FAQs
- Summary of our guide on how a HELOC can affect your credit
What is a HELOC and how does it work?
HELOCs are one of several options — including home equity loans and cash-out finance loans — available to homeowners looking to access their home equity. With a HELOC, borrowers gain access to a maximum amount of money or credit limit from which they can draw as needed. And just as they would with a credit card, borrowers can use all or a portion of the funds available to them, then repay the amount and borrow again.
Like credit cards, HELOCs also generally feature variable interest rates. Since these can increase or decrease in step with the prime rate, loan payments may change considerably from month to month. Some lenders offer a fixed-rate HELOC option, but you must usually pay a fee each time you switch from a variable to a fixed rate.
HELOCs are structured differently than credit cards. Borrowers may use their credit line only during a predetermined draw period that typically spans five, 10 or 15 years. After that, the HELOC enters a 15- to 20-year repayment period, during which borrowers can no longer access the funds and must begin making interest and principal payments on what they’ve borrowed.
Another major difference between credit cards and HELOCs is that the former are a form of unsecured debt (unless they are secured credit cards). That means no assets are on the line if you fail to pay off your balance. By contrast, HELOCs use your home as collateral. Failure to make monthly HELOC payments can leave you with a debt that exceeds the value of your home (what’s referred to as an “underwater mortgage”) or lead to your home being foreclosed on by the bank.
To learn more about how HELOCs work and how they compare to other home equity products, read our articles on HELOC vs. Cash-out refinance loans and HELOCs vs. Home equity loans.
Pros and cons of HELOCs
- Lower interest rates than credit cards and personal loans
- Access up to 85% of the equity in your home
- Pay interest only on what you borrow
- Interest may be tax deductible if funds are used for home improvements
- Interest rates are typically variable, and switching to a fixed rate entails a fee
- Monthly payments can rise along with interest rates
- Missing loan payments can lead to negative equity or foreclosure
How does a HELOC affect your credit score?
When you apply for a HELOC or any other type of financing, your lender will conduct a hard credit inquiry to determine your creditworthiness. According to Equifax, hard credit pulls may lower your credit score by a few points and stay on your credit report for up to two years. However, if you’re shopping for a mortgage and comparing loan offers from different lenders, multiple credit inquiries within a period of 14 to 45 days will count as one.
After approval, how your HELOC affects your credit will entirely depend on you. As with other debts, paying your loan on time will help you improve your credit over time, while failing to make on-time payments will negatively affect your credit history and score. Again, your lender could foreclose on your home if you can’t repay your HELOC. And like some bankruptcies, foreclosures remain on your credit report for seven years.
Experian states that a common misconception about HELOCs is that they affect your credit utilization ratio, one of the factors that make up your credit score. But unlike most credit cards, which are a form of unsecured revolving credit, HELOCs are secured by your home. They are, therefore, excluded from credit utilization calculations under the most widely used credit scoring model in the mortgage industry, FICO.
To lower their credit utilization ratio (the percentage of your available credit currently in use) and improve their credit score, many homeowners turn to HELOCs to pay off high-interest credit card debt. Also, HELOCs often feature lower interest rates than credit cards and personal loans, making them a more affordable option.
What are the factors that affect a credit score?
The factors that affect your credit score vary depending on the credit scoring model used. The lending industry’s most popular credit score models are FICO and VantageScore.
Here’s how each model weighs the different factors that go into their credit score calculations:
| FICO | VantageScore |
|---|---|
Payment history: 35% | Total credit usage, balance and available credit: extremely influential |
Amounts owed: 30% | Credit mix and experience: highly influential |
Length of credit history: 15% | Payment history: moderately influential |
Credit mix: 10% | Age of credit history: less influential |
New credit: 10% | New accounts opened: less influential |
In mortgage lending, the most widely used credit scoring model is FICO. With this in mind, let’s take a closer look at each factor that goes into this score.
1. Payment history
Payment history makes up 35% of your credit score. This factor reflects how well — or poorly — you have paid your credit accounts in the past. According to FICO, research shows that payment history is one of the strongest predictors of your ability to pay your debts in the future. Credit accounts considered for this calculation include mortgage loans, credit cards, retail accounts and installment loans (such as car loans and even home equity loans), among others.
2. Amounts owed
The second most important factor in your credit score calculation is your total debt, which accounts for 30% of your FICO score. FICO research found that consumers’ overall level of debt is predictive of their ability to repay their loans, as more debt could mean they’re overextending themselves financially and, therefore, more likely to make late or missed payments. Your overall debt, what you owe on specific accounts, the number of accounts that have balances and your credit utilization ratio all fall under this category.
3. Length of credit history
While the length of your credit history only accounts for 15% of your score, having long-standing credit accounts will positively affect your credit. For this calculation, FICO looks at:
- How long your accounts have been open
- The age of your oldest and your newest account
- The average age of all accounts
- How long it has been since a particular account has been used
4. Credit mix
Credit mix accounts for 10% of your score, and encompasses all the different types of credit under your name — credit cards, retail accounts, installment loans, etc. According to FICO, credit mix lets creditors know how well you can handle different loan types. But while having a varied credit mix can help your score, applying for different types of loans to diversify your credit mix would be counterproductive, resulting in hard credit inquiries that will knock points off your score.
5. New credit
New credit accounts for another 10% of your credit score. When you open new accounts, these stay on your credit report for up to two years. Too many recent credit applications on your record represent a risk to lenders, especially if your credit history is shorter. For this calculation, FICO looks at the number and types of new credit accounts under your name, the number of recent inquiries into your credit and the time that has transpired since you last applied for new credit.
How to maintain a good credit score
To maintain a good credit score, you first need to keep track of your credit history by reviewing your credit reports at least once a year. You can get your reports from all three credit bureaus from AnnualCreditReport.com, the only source for free credit reports authorized by the federal government.
Once you have all three of your reports, go through them and verify that all personal and account information is correct. If you find any incorrect negative items on your reports, dispute the information with the corresponding credit bureau. Correcting any errors may not have an immediate effect but could increase your credit score within several weeks.
You can check your credit score by purchasing it directly from FICO. If you don’t want to pay for it, many credit card providers provide customers free access to their FICO scores as a perk. Alternatively, several platforms like Credit Karma offer free VantageScore 3.0 scores, which are different from FICO scores but can give you a general idea of your credit health.
Consumers who don’t want to spend time or energy reviewing their reports and correcting inaccuracies can opt to hire a credit repair service to take care of the process on their behalf. Just keep in mind that the best credit repair companies don’t charge upfront, clearly inform you of what their services will entail and provide a contract that includes what you will pay and when you can expect results.
For more information, read the CFPB’s guide on how to avoid credit repair scams.
HELOCs and credit scores FAQs
Does a HELOC show up on your credit record?
When you apply for a HELOC, the lender will carry out a hard credit inquiry, which could lower your credit score by a few points. And while that new credit application could remain on your credit report for up to two years, it won't affect your credit score for more than a year.
One you've obtained a home equity loan, failing to pay your loan on time will affect your credit. Moreover, missed payments could lead you to become underwater on your mortgage or even lose your home to foreclosure.
Does a HELOC affect my debt-to-income ratio?
A HELOC will increase your debt-to-income ratio, which is your total debt divided by your gross monthly income. Lenders use this measure to determine how much of your income goes toward paying other financial obligations — and therefore, your likelihood of defaulting on a new loan. A high DTI ratio (of over 45%) could disqualify you from obtaining other loans and credit.
What is the minimum credit score needed for a HELOC?</h3>
The minimum credit score needed to qualify for a HELOC will depend on your lender and the line of credit amount you're looking to obtain, among other factors. Many lenders we have reviewed require a minimum credit score of 620 (fair), while others set their minimum score in the 720 (good) range.
Keep in mind that it's still possible to get a home equity loan with bad credit, but doing this would require satisfying the other eligibility criteria set forth by your lender. If your low credit score is due to your debt exceeding your income, you might not be eligible for a HELOC. In such cases, the best course of action is to work on lowering your debt and improving your credit score.
Does a HELOC impact my FICO score?
A HELOC could impact your FICO score if you fail to make your loan payments on time. Missed payments would count toward FICO's payment history factor, on which 35% of your score is based.
What doesn't affect your credit score?
According to Experian and Equifax, these are just a few of the factors that do not have a bearing on your credit history or score:
- Your demographic information (age, race, religion, etc.)
- Your job title and income
- Getting married or divorced
- Being denied a credit application
- Checking your credit reports
- Paying cash or with a debit card
Summary of our guide on how a HELOC can affect your credit score
Applying for a HELOC will entail the lender making a hard credit inquiry on your credit file that will knock some points off your credit score. The effects of that hard pull may reflect on your score for up to a year, and the new credit application can remain on your credit report for up to two years.
After you obtain a HELOC, making your monthly payments on time will help increase your credit score. The opposite is also true; failing to make on-time loan payments will lower your score and leave you saddled with debt that could far exceed your home’s value. In the worst of cases, you could even lose your home to foreclosure, a data point that will remain on your credit report for seven years.
Joan is a professional translator, writer and editor with a special interest in personal finance and insurance topics. She has been a contributing author and independent researcher at ConsumersAdvocate.org since 2017 and an editor at Money since 2019. Her work has been featured in MSN Money and Apple News.