How Does a HELOC Affect Your Credit Score?

Opening a home equity line of credit (HELOC) can affect your credit score, but how much depends on your ability to maintain repayment habits and only draw funds from your home's equity as needed. HELOCs can affect your credit score by influencing your credit utilization rate, payment history, and credit mix.

Here, we'll break down how HELOCs impact your credit score, how lenders assess your HELOC debt, and tips for minimizing these risks.

What Is a HELOC?

A home equity line of credit (HELOC) is a revolving line of credit you can take out against the equity in your home. During what's known as a "draw period," homebuyers use their home as collateral to borrow funds as needed up to a set credit limit, and pay them back with interest during a "repayment period."

With a HELOC, the lender will place a credit limit, and then you decide how much home equity to use within that limit. Usually, lenders will allow up to 85% of your current home value, though some might allow more. Once that amount is determined, subtract what you still owe on your current mortgage and the remainder is the amount you can generally access as a potential line of credit, subject to lender approval.

Some HELOCs require the full loan amount to be taken at the time of origination with additional draws during the draw period as the balance is paid down.

Does a HELOC Impact Your Credit Score?

On a credit report, HELOCs are usually listed as revolving credit, like a credit card, and not as a second mortgage. Too many open lines of credit can affect the average length of your credit history, which could potentially lower your credit score.

Whether a HELOC helps or hurts your credit score after you've successfully applied depends on how you manage your payments. A HELOC typically has a variable interest rate, so payments can increase when interest rates rise and decrease when interest rates fall. However, there are lenders that offer fixed-rate HELOCs as well.

This variability can make budgeting challenging, and being unable to keep up with a higher payment could hurt your credit. On the flip side, like with any bill or monthly payment, consistently making payments on time can improve your credit score. If you're a Freedom Mortgage customer, primary borrowers can check their credit score on our mobile app.

Key Impacts HELOCs Have on Credit Scores

Because HELOCs are a form of revolving credit, they affect several parts of your credit score. Here are the main categories affected:

• Credit utilization ratio: Credit utilization is a percentage that represents how much revolving credit you've used against how much is available. The more you borrow against your home's equity, the higher your ratio will be.
• Hard inquiry: HELOC applications can lower your credit score by roughly 5 to 10 points, and remain on your file for two years, while only affecting your credit score for one.
• Credit mix and credit history: HELOCs can diversify your credit mix, and if your monthly payments are made on time, they can improve your credit history and help you maintain a healthy credit score.

Keep in mind that if you use all of your available equity, you may not have room for unexpected expenses, like a medical issue, or home or car repairs. Carefully consider what financial options you need to have available should emergency costs arise.

Will Closing a HELOC Affect My Credit Score?

Part of your credit score is determined by your credit utilization, which is how much credit you use. However, if you have other credit lines besides a HELOC (like credit cards), then closing them may have a minor impact on your credit score.

Another reason to close the HELOC—if you don't need to take any more money out or if you pay off the balance—is that it will close out the lien on your home that a HELOC puts in place as collateral. Key differences to note is that paying off the HELOC by having a zero balance means the credit remains available to reuse during the draw period, whereas if the account is closed, meaning, canceled, you cannot borrow from it again. If you want to sell your home and purchase another, then you'd first need to close the HELOC. If you're considering a HELOC, determine your long-term financial goals and weigh them against the potential credit impact.

How to Minimize a HELOC's Impact on Your Credit Score

HELOCs can slightly affect your credit score, yet by following these few steps, you can manage this impact and protect your credit.

• Pay down other debts before applying: Paying down other debts (i.e., credit cards) can lessen the impact on your credit by lowering your credit utilization ratio.
• Shop for rates in a timely fashion: HELOC application processes typically allow for a short window of time to shop for rates—usually about 2 weeks. During this time, multiple hard credit inquiries are only counted as a single inquiry.
• Maintain an on-time payment history: Making on-time payments can significantly improve your credit history and credit scores long-term, while making a payment of 30 or more days late can hurt your credit.
• Don't max out your HELOC: Maxing out your HELOC, especially early in the draw period, increases your credit utilization ratio and can significantly lower your credit score. If these payments become unaffordable, your home could risk foreclosure.
• Avoid closing the HELOC early: It's possible that closing your HELOC early could decrease your credit score because it affects your credit utilization, and in some cases, it could also trigger prepayment penalties set by your lender. Prepayment penalties are fees some lenders charge for paying off a HELOC before the anticipated time.

HELOCs and Their Impact on Credit Scores FAQs

Here are some additional questions you may have about how HELOCs impact your credit score.

How Can a HELOC Improve Your Credit Score?

HELOCs don't terribly impact your credit score; in fact, if you borrow modest funds and pay them back over the entire repayment period, they can potentially improve your credit score and lower your credit utilization rate.

How Does HELOC Usage Affect Your Credit Utilization?

HELOCs can add a large credit line to your profile, which may lower your overall utilization if you don't borrow much from it. However, if you draw heavily on the HELOC, your utilization can increase, potentially lowering your credit score.

What Happens if You Miss HELOC Payments?

Depending on your lender, missing a monthly payment may incur a fee between $25 and $50, which may not sound like much, but can add up quickly if you fall behind on your payments. Payments made 30 days or more past due can severely hurt your credit, sometimes causing a drop of 50 to 100 points or more, and these penalties worsen if you're 60-90 days late. Repeated late payments of 30 days or more can put your home at a default risk, and even just one payment made 120 days late can result in foreclosure.

How Do Lenders View HELOC Debt?

Lenders typically view HELOC debt as revolving credit and focus on how much you're actually using. They analyze your outstanding balance, monthly payments, and how it affects your overall debt-to-income (DTI) ratio. Responsible use with low balances can indicate strong credit management, while high utilization may raise concerns about risk.

Final Thoughts: A HELOC's Credit Impact May Be Worth It

HELOCs can be useful if you're looking for a housing arrangement that allows for more financial flexibility than a mortgage, but their impact on your credit score ultimately depends on your usage. Although there are ways to minimize your credit debt, like paying down other debts, making timely payments, and avoiding closing the HELOC early, you should expect a slight dip in your credit after applying for a HELOC. Just like any other form of credit, thoughtful planning and responsible borrowing will work in your favor. If you're ready to take the next step, explore your options and start your HELOC application today.