Do HELOCs affect your credit?

Accessing your home equity with a home equity line of credit (HELOC) could be a smart move to pay off other debts or get cash for home renovations or other financial goals. Before you apply for a HELOC, we’ll help you prepare for possible changes to your credit score. 

A home equity line of credit (HELOC) could affect your credit score in several ways. Your credit score might take a temporary dip during the application process. And as you make payments on the HELOC in the future, this could affect your payment history—in a good way, if your payments are on time. 

How HELOCs affect your credit isn’t automatically good or bad. Just like credit cards, loans, or other credit accounts, the impact depends less on the HELOC itself and more on how you manage it.

A HELOC could affect your credit in several ways, including a temporary dip from the credit check and your payment history over time. The impact depends on how you manage the account.

Let’s look at how a HELOC interacts with your credit profile—and how you can plan ahead for any short-term changes to your score when applying for a HELOC.

How a HELOC can affect your credit score

A HELOC is a revolving line of credit, similar to a credit card. This means you can borrow up to a certain limit, pay it back, and borrow again. 

One big difference between a credit card and a HELOC is that credit cards don't have an end date for borrowing—you can borrow from a credit card as long as your account is open. With a HELOC, you can only borrow from the line of credit during the draw period, which is often five to 10 years after opening the HELOC account.

A HELOC is a secured line of credit, guaranteed by your home. Credit cards are unsecured. 

Even though a HELOC is revolving credit like a credit card, some credit scoring models treat it as an installment loan. This matters because high balances on credit cards tend to hurt your credit standing, but a high HELOC balance might not have the same effect.

Your credit score could be affected at multiple stages with a HELOC: 

• When you apply

• When you draw funds 

• As long as your HELOC account is open based on how you manage payments

Some credit impacts from a HELOC are temporary and minor, while others can be more serious and long-lasting depending on your financial behavior.

Your credit score gets affected by several factors:

• Credit inquiries

• Your overall credit utilization ratio 

• Payment history 

• Age of your credit accounts 

• Your credit mix

Opening and using a HELOC can affect most of these factors.

The short-term impact of opening a HELOC

When you apply for a HELOC, the lender typically runs a hard credit inquiry (also called a hard credit pull) to review your creditworthiness. This inquiry typically causes a small, temporary dip in your credit score—usually just a few points. The hard credit inquiry stays on your credit report for two years, and the change in credit score might last for one year—but most people find the credit score impact goes away within a few months. 

The credit impact of a hard credit inquiry means it’s best to apply for a HELOC only when you’re sure you’re ready to take that step and that you want to work with that lender. When you apply for credit too often in too short a time, this could create a negative credit impact that makes you look risky to lenders. Too many recent hard credit inquiries on a credit report might cause lenders to deny a loan application or charge higher rates and fees. 

You can rate shop for HELOCs without hurting your credit score. If you have multiple hard credit inquiries with different lenders for the same type of loan within a short time, credit bureaus will typically treat this as one credit inquiry. It's best to try to do your rate shopping within a 14-day window. This helps protect your credit score when you’re trying to find the right HELOC lender for your needs. 

Opening a new HELOC account also alters the average age of your credit accounts. A new HELOC could lower your average account age. This could have a modest negative effect on your credit score. iIf you already have a long credit history with several older accounts, the new HELOC might have a smaller impact.

How HELOC balances affect credit utilization

Credit utilization is one of the biggest factors in your credit score. You can keep track of your credit utilization by calculating the percentage of revolving credit you're using compared to your total available credit. 

Here’s how to calculate your credit utilization ratio. First, add your credit balances. Then take the total of all your credit limits, across your three cards. Divide your total debt by your credit limit, and multiply by 100. 

Let’s say you have three credit cards, and your balances total $5,000 across all the cards. Your credit limit across the three cards is $15,000. 

Here’s the math: 

$5,000 / $15,000 = .33

.33 x 100 = 30%

Your credit utilization rate is 33%.

A HELOC is revolving credit, so any balance you carry might count toward your credit utilization ratio. Different types of credit scores treat your HELOC differently. FICO scores don’t include HELOCs in credit utilization calculations, but VantageScore might. Depending on which credit score you look at, your HELOC could have an impact.  

Don’t ignore credit utilization on your HELOC. If you draw a large amount from your HELOC relative to your credit limit, your utilization ratio could increase, which may impact your credit standing. Borrowing lots of money from a HELOC could also limit your ability to be approved for future credit. 

Opening a HELOC could also affect your credit utilization in a good way. If you have a HELOC with a low balance, you could increase your total available credit. This could lower your overall utilization ratio, which may have a positive effect on your credit score. And lower debt is good for your finances in general.

Payment history and long-term credit impact

Your payment history is the single most important factor in your credit score. Making on-time payments on your HELOC helps build a positive credit history. Consistent, on-time payments on a HELOC, just like other loans and credit accounts, can demonstrate to lenders that you're able to manage credit well.

If you miss payments or make late payments on a HELOC, just like with other loans, your credit standing could suffer. Even one missed payment can stay on your credit report for up to seven years and have a lasting negative impact. 

If you’re applying for a HELOC, make a plan for how you’ll afford the monthly payments during both the draw period and the repayment period. Some lenders allow interest-only payments during the draw period, which means your required minimum payment amount will spike when your repayment period begins.

A well-managed HELOC could also improve your credit mix, which is a smaller factor in your credit score. Credit mix means having different types of loans and credit accounts, such as a mortgage, auto loan, and credit cards. Showing that you have experience with different credit types—such as revolving credit and installment loans—could help your credit score. 

Will a HELOC hurt your credit if you don't use it?

If you open a HELOC but don't draw from it, or if you pay off the balance quickly during the draw period, the “unused” HELOC account will still appear on your credit report. But if you don’t have a balance, the HELOC won't negatively affect your credit utilization. It might even help your credit score by increasing your total available credit (and decreasing your credit utilization ratio). Some people like to open a HELOC as a backup, so they can use that line of credit as an emergency fund, or have that credit ready to go in case of unexpected home repairs. 

Keep in mind that even if you have an unused HELOC, you still need to pay attention to the terms of the account and manage it carefully. Some lenders may charge inactivity fees, annual fees, or prepayment penalties on unused HELOCs. 

And keeping an unused HELOC as an emergency fund isn’t the same as having cash in the bank—your unused HELOC is temporary, and could be closed for reasons beyond your control. Lenders might reduce or freeze your unused HELOCs credit limit in case:

• The lender’s risk management and credit standards change

• The value of your home declines

• Your financial situation changes in a way that damages your credit score 

If the lender closes your unused HELOC account, you'll lose that amount of available credit.

When a HELOC can negatively affect your credit the most

Missing payments is a primary way that a HELOC can hurt your credit score. If you fall seriously behind, the lender may report the account as delinquent, which could have severe and long-lasting consequences to your credit.

Opening multiple new credit accounts at the same time—such as a HELOC, a credit card, and a personal loan—could also hurt your credit score. Each application triggers a hard inquiry, and adding several new accounts at once can make you appear financially overextended.

Using a HELOC to juggle multiple unsecured debts without a clear debt payoff plan could also indirectly hurt your credit score. If you use a HELOC for debt consolidation but take on more credit card debt, you could make your financial situation worse. Becoming overextended could put you at risk of falling behind, damaging your credit.

Managed properly, HELOCs could improve your personal finances. Just like any other loan or credit account, HELOCs can have risks to your credit score and your overall financial stability. Before you apply for a HELOC, have two clear goals:

• Understand how your credit score might change in the short run 

• Create a solid long-term vision for how to fit the new HELOC payments into your budget