How Does a HELOC Affect Your Credit Score?

Learn how HELOC can impact your credit history

A couple sits at a table in front of a home.
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A home equity line of credit, or HELOC, lets a homeowner tap into their home equity to borrow money for major expenses such as home improvements or medical bills, or for debt consolidation. Like any financial product, HELOCs can impact your credit score, depending on how you manage it.

A HELOC is a revolving line of credit with a variable interest rate, similar to a credit card. A borrower can then withdraw from that line of credit as needed. Your home serves as the collateral for a HELOC, meaning you could lose your home if you don’t keep up with your HELOC payments.

Learn more about HELOCs and how they can potentially boost or harm your credit score.

Key Takeaways

  • Applying for a HELOC can cause a small, temporary decline in your credit score.
  • If you have a track record of making on-time payments on a HELOC, your credit score can benefit.
  • Unlike a credit card balance, the balance of a HELOC does not factor into your credit utilization ratio for your FICO credit score because the credit is secured by your home. Other credit-scoring models may factor in your HELOC balance.

How Does a HELOC Work?

A HELOC features a draw period, which is when you can use your line of credit any way you’d like. It usually lasts about five to 10 years, depending on the lender’s terms.

During the draw period, you make interest-only payments. When the draw period ends, you can no longer withdraw money, and your payments begin including the principal you owe. The repayment period usually lasts about 10 to 20 years.

As an example, a HELOC may have (assuming you take the full loan amount):

  • Loan amount: $75,000
  • Interest rate: 5%
  • Draw period: 10 years
  • Repayment period: 20 years
  • Monthly interest-only payment during draw period: $312.50
  • Monthly principal and interest payment during repayment period: $494.97

How Does a HELOC Differ From a Home Equity Loan?

Both a HELOC and a home equity loan allow you to borrow against your home’s equity, but they have several key differences, including:

  • A HELOC lets you withdraw money from your line of credit over a set period of time, while a home equity loan is a lump-sum amount of cash.
  • Interest rates for HELOCs typically can vary over time, whereas interest rates for home equity loans are usually fixed.
  • Monthly payments for a HELOC may change, while monthly payments for a home equity loan typically are fixed.

How a HELOC Can Affect Your Credit Score

A HELOC can have either a negative or positive impact on your credit history in several ways. Let’s look at some of the primary ways HELOCs can affect your credit score.

When You Apply for a HELOC

When you apply for a HELOC, a lender will make a “hard inquiry” to review your credit report. A hard inquiry stays on your credit report for two years and can lead to a small, but temporary, dip in your credit score.

You can apply for a HELOC with several lenders so you can find the best rates without taking several hits to your credit score, by applying for them within a time period of about 14 to 45 days. So, several hard inquiries can have a similar impact as one inquiry would.

When You Make Payments on Your HELOC

Payment history also impacts your credit score. So, if you make timely payments on your HELOC, your credit score could improve. If you make payments past the due date or miss payments altogether, your credit score could take a hit.

Payment history makes up 35% of the widely used FICO score, the most significant factor in calculating your score.

When You Use Your HELOC

Credit utilization represents 30% of the widely used FICO score. Your credit utilization ratio divides the amount of revolving credit (typically credit cards) that you’re using by the amount of revolving credit available to you. For example, if you’ve got $30,000 in available revolving credit and you’re using $7,500, your credit utilization ratio would be 25%.

However, FICO does not include HELOCs in its calculation of credit utilization ratios because the loans are secured by a borrower’s home. Other credit-scoring models may take HELOCs into consideration.

Protecting Your Credit When You Have a HELOC

Managing your HELOC responsibly can help protect your credit score. You can take steps such as:

  • Avoid applying for other types of credit when you apply for a HELOC. The “new credit” factor represents 10% of your FICO score.
  • Establish a budget that includes a plan for making monthly repayments.
  • Always make payments on time.
  • Prepare for potential increases in payments, due to transitioning to the repayment period or to a higher interest rate.

A HELOC can be a valuable source of cash for home improvement projects, college tuition, and other major expenses. Being responsible with a HELOC—by making timely payments, for instance—can help increase your credit score.

Frequently Asked Questions (FAQs)

How does a HELOC affect your credit utilization ratio?

The widely used FICO credit-scoring model does not include HELOCs in its calculation of credit utilization ratios. However, other credit-scoring models may take HELOCs into consideration. Credit utilization can represent as much as 30% of a FICO score.

What’s the minimum credit score you need to get a HELOC?

You typically need a FICO score of at least 680 to get a HELOC. FICO defines a good score as one ranging from 670 to 789. Generally, FICO scores extend from a low of 300 to a high of 850.

How do you get a HELOC?

Many lenders offer HELOCs. You can usually apply for a HELOC online, in person, or over the phone. You’ll need to have enough home equity to qualify. Lender terms vary. For example, a lender may let you borrow as much as 85% of the value of your home, minus the amount you still owe on your mortgage.

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