How does a HELOC affect your credit score?

Your home's equity could help you cross some big—or small—financial goals off your list. You could use a home equity line of credit (HELOC) to consolidate debt, make some home improvements, or cover a large necessary expense. 

As with other credit products, however, a HELOC could also help or hurt your credit scores depending on how you use it. 

A HELOC can affect your credit score in several ways. When you apply for a HELOC and agree to let a lender check your credit, you might see a small, temporary dip in your score. On the other hand, your credit score could improve when you consistently make HELOC payments on time.

Let's take a look at how HELOCs work and what a HELOC might mean for your credit.

Achieve is not a Credit Repair Organization and does not provide or offer services or advice to repair, modify, or improve your credit. 

Does applying for a HELOC hurt your credit score?

Applying for a HELOC—or any other type of loan or credit line—could hurt your credit score temporarily if a lender performs a hard credit check. Hard credit pulls appear on your credit reports and factor into your credit score calculations. Typically, you can expect to lose a few points for each new inquiry that lands on your credit report. 

The loss isn't permanent, however. While an inquiry can stay on your credit report for two years, its impact on your credit score tends to fade after one year. 

Prequalification can help you compare rates without impacting your credit score. Lenders that offer rate quotes for prequalification or preapproval may use a soft credit check, which doesn't show up on credit reports. You won't see a HELOC hard inquiry until you actually apply for a line of credit. 

How a HELOC could affect your credit score after approval

You could feel HELOC credit score impacts in several ways once you're approved. When you open a new line of credit, that affects several factors used in credit score calculations.  

• Payment history. Payment history makes up the largest share of your FICO Score calculation, at 35%. On-time HELOC payments are generally good for your credit scores; late or missed payments could cause damage to your credit scores.

• Credit mix. Credit mix refers to the types of credit you use, and it makes up 10% of your FICO Score. A diversified credit mix that includes a HELOC, credit cards, and installment loans could help your scores more than having just one type of credit. 

• Length of credit history. Your credit age, or how long you've used credit, influences 15% of your FICO Score calculations. When you open a new line of credit, that shortens your average account age and may decrease your score for a time. That decline can shift, however, the longer your HELOC stays open. 

A HELOC could also affect credit utilization if you use your line of credit to consolidate credit cards. Credit utilization measures how much of your credit card credit limits you use at any given time. If you use a HELOC to pay off credit card balances, your utilization could change.

Could a HELOC help your credit score over time?

Yes, a HELOC could potentially help improve your credit if you make on-time payments over time. The long-term impact of a HELOC on your credit scores is influenced by how you use your line of credit. 

You could see improvement in your scores if you:

• Make HELOC payments on time or early each month

• Use a HELOC alongside other types of credit to improve your credit mix

• Reduce credit card utilization ratios when you use a HELOC to pay off those balances 

Positive credit score impacts are not guaranteed, however. A financial hardship, for example, could derail your ability to keep up with HELOC payments. Even one late payment could cause a substantial drop in your scores. Ultimately, a HELOC is a tool that helps you reach your financial goals, not a magic wand.

What happens to your credit score when you pay off or close a HELOC?

When you pay off a HELOC or close your account, it doesn't disappear from your credit reports. A HELOC closed in good standing stays on your credit reports for up to 10 years. This could be good for your scores if you made all of your payments on time.

If you missed payments or defaulted, however, the lender will likely report that to the credit bureaus. Negative items can stay on your credit reports for seven years, and they don't go away just because you close the account. Late payments could cause a lot of credit score damage, though the effects tend to fade over time.

HELOC vs. other borrowing options: credit impact

A HELOC enables you to access cash for virtually any need, but there are other ways to borrow. Credit cards, personal loans, or a cash-out refinance could give you access to funds. Each one may have different credit score impacts.

HELOC vs. credit cards

When you apply for a credit card, there's an immediate credit score impact. Credit card companies perform hard credit checks, just like HELOC lenders. Once your account is open, it factors into your credit mix, credit age, payment history, and utilization. 

Here's how credit card score impacts compare to HELOCs, at a glance. 

• On-time payments positively impact your credit; late payments or defaults hurt it.

• Late payments stay on your credit for seven years. 

• A closed account in good standing can stay on your credit for 10 years.

• Credit card purchases increase your credit utilization, while payments reduce it. 

FICO credit scores don't typically include HELOC balances in your utilization, though some VantageScore credit scores may.

HELOCs vs. personal loans

Personal loans are installment loans, rather than credit lines. However, they impact your credit in many of the same ways a HELOC might, with a few minor differences.

Here's how personal loans could affect your credit:

• The initial hard inquiry could temporarily ding your score by a few points.

• Adding a new account could decrease your average account age, another minor ding.

• On-time payments could help your scores over time, while late payments can hurt them. 

• Closed personal loans in good standing can stay on your credit for 10 years. 

• Defaulted loans can stay on your credit for seven years. 

Like HELOCs, personal loans may also help your credit mix—just in a different way. Personal loans are installment loans, while HELOCs are revolving credit lines. Credit scoring models tend to treat the two types of credit slightly differently, and both could add diversity to your credit mix..

HELOC vs. cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and enables you to withdraw your equity in cash at closing. Equity is the difference between what you owe on your home and its value. 

Here's how a cash-out refinance affects credit scores:

• The hard inquiry when you apply for a cash-out refinance loan could knock a few points off your scores.

• When you close your current mortgage and open a new one, you shorten your credit age.

• On-time payments to a cash-out refinance loan should help your scores, while late payments or defaults could hurt them.

• A cash-out refinance could improve your credit utilization ratio if you use your equity to pay off credit card debt.

A paid-off cash-out refinance loan can stay on your credit reports for 10 years. If you default on a cash-out refinance, that stays on your credit reports for seven years. If a foreclosure follows, that can show up as a separate entry on your credit and stay there for seven years as well.