Does a HELOC Affect Your Credit Score? (2024 Guide) (2024)

A HELOC is a revolving loan that allows you to access the equity in your home to pay for large purchases or consolidate consumer debt. A HELOC uses your home as collateral, so the interest rates on a HELOC are typically lower than rates on unsecured loans, such as credit cards and personal loans.

To determine how much you may be able to borrow, a lender gauges the appraised value of your home minus what you still owe on your mortgage — your equity, in other words. Most lenders allow you to borrow a certain percentage of the equity in your home, so the more equity you have, the more you may be able to borrow.

Unlike a home equity loan, which you receive as a lump sum, you only have to pay back what you actually spend from a HELOC. And as you pay back the balance, you can continue to draw additional amounts from your HELOC over time, as long as you don’t go over your credit limit.

Paying Back a HELOC

HELOC loan terms set up two periods: the draw period and the repayment period.

During the draw period, you can spend up to your credit limit whenever you like. Typically, you access the funds from a HELOC with a credit card or special checks that are linked to the account. It’s important to note that some lenders require you to withdraw a minimum amount for every transaction or keep a minimum balance on the account.

Once the borrowing period is over, you enter the repayment period. Whether you were making interest-only payments, partial payments or no payments at all during the borrowing period, your lender will have specific requirements when it comes to repaying the full line of credit.

Some lenders will give you several years to repay the loan in monthly installments, while others may require that you repay the credit amount in full. This is known as a balloon payment. Ensure you are well aware of your lender’s repayment requirements when you open a HELOC. If you can’t make the payments, you risk losing your house to the lender.

Benefits of Using a HELOC

When deciding whether or not a HELOC is right for you, consider the following benefits of a HELOC:

• Once you apply and are approved, the credit is there and can be used as an emergency fund. You don’t have to draw from a HELOC, but you can if you need to.
• During the borrowing period, you may be able to make interest-only payments, which means the initial payments will be low.
• A HELOC may entitle you to certain tax benefits.
• You don’t have to pay back the entire amount you qualify for, just the amount you spend.
• You may continue to draw from the credit line as much or as little as needed during the borrowing period without any extra approvals or paperwork.
• The average HELOC interest rate is generally below that of a credit card.

Whatever you choose to do with your money, it’s smart to make a plan and stick to it. It can be tempting to spend your entire credit limit, but if you can’t pay back the principal plus interest, you may find yourself in a tough spot when the payments come due.

>> Related: Learn more about how to get the best HELOC rate

A HELOC may affect your credit score, but not the way you might think. Keep in mind that credit scores include seven different pieces of information:

• Bill-paying history
• Current unpaid debt
• The type and number of loans you have
• History of loan accounts
• Percentage of credit limit you are using
• How often you apply for new credit
• Whether and when you have ever had a debt sent to collections, had a foreclosure or declared bankruptcy

A HELOC in your name impacts these factors, but how you use that credit is what affects your credit score. Making on-time payments is one factor that may positively impact your credit score, while late or missed payments can negatively affect your credit score.

HELOCS are considered a revolving type of credit like credit cards, but they don’t impact your credit score the same way. Remember that credit utilization is a factor in your credit score. Experts suggest using no more than 30% of your available credit limit to boost your credit score. However, the FICO credit-scoring model excludes HELOCs from the 30% credit utilization ratio, in part because the credit line is secured by the borrower’s home.

Another factor to consider is how many “hard pulls” on your credit are made when choosing the right HELOC (or any loan) in a six-month period. If you receive multiple quotes from different lenders that all require a hard pull on your credit history, this may negatively impact your credit score. While shopping around, try to consolidate your inquiries to a 15-day to 45-day window, as credit bureaus consider similar inquiries made in a short period of time as one pull on your credit.

>> Related: Learn more about the best uses for a HELOC

Credit scores are multipoint numbers that are influenced by multiple factors. Simply having one type of loan over another doesn’t mean your credit will be good or bad. Rather, your credit score depends on the length of your debt history, the timeliness of your payments and the variety of debt you hold.

If you’ve ever paid off a car loan and then saw your credit score go down, you might have wondered why. This is because you no longer have that specific type of debt influencing your credit score. Thus, a HELOC can add variety to your credit history while also carrying the weight of a mortgage-related loan, which is viewed as more dependable by credit bureaus because it’s attached to collateral.

Another factor to consider is whether you pay your HELOC payments on time every month. This shows credit bureaus you are reliable and may, in turn, improve your credit score. But if you miss payments or make late payments, not only might this negatively impact your credit score, but you’ll also be at risk of losing your home.

How To Safeguard Your Credit

You may be able to positively impact your credit score with a HELOC. If you have multiple high-interest credit cards or personal loans you’re not able to make payments on, you may be able to consolidate your loans into a low-interest HELOC. Then you’re simply making one payment, which can make your payment schedule more reliable.

So, when you’re considering a HELOC, make sure you can commit to the payment terms the lender sets. Read your disclosures very carefully and ask questions to ensure you can safely adhere to the terms and conditions. If you follow a strict plan, you may be able to use your HELOC to have a positive impact on your credit score while achieving your other financial goals.

There are a few steps you can take to obtain a HELOC with minimal impact on your credit:

1. Start by checking your credit score to understand how a lender might view your application. If your credit score is low, consider working to improve your score before applying for a HELOC.
2. Evaluate your home equity with a qualified appraiser to determine how much you may be able to borrow.
3. Shop different lenders and compare rates and terms to help ensure you are getting the best deal for your situation.
4. Keep any credit applications within a 14- to 45-day period to aid in making sure the inquiries are seen as only one credit pull.
5. Remember that a hard pull on your credit may only result in a minimal and temporary drop in your credit score. If these steps are followed with on-time payments and a healthy credit history, your credit score will likely return to its original state.

If you follow these steps, you can stay in control of your credit by making measured choices that work best for your situation. And don’t be afraid to take step No. 2 seriously — this is a key part of getting the best rate. Make sure you’re carefully considering all your options before making a long-term decision that can provide you with greater cash flow, but also one that may have dire consequences if you don’t follow the payment plan.

>> Related: Learn more about how much you can borrow with a HELOC

HELOCs can be a useful asset to help you reach your financial goals. A HELOC can offer you a safety net or fund projects that may greatly improve your long-term home equity. HELOCs can also be used to consolidate your high-interest debt, allowing you to improve your financial health long term.

But a HELOC comes with responsibility. HELOCs use your home as collateral, and if you should lapse in payments or break the terms and conditions of your lending contract, you could be at risk of losing your home to foreclosure. As with all loans and lines of credit, it’s important to make informed, level-headed decisions and take your time to understand what you are signing your name to.