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Applying for and using a home equity line of credit (HELOC) can affect your credit scores. Just like with other types of credit accounts, such as a loan or credit card, whether a HELOC helps or hurts your credit depends on how you use the account. Missing payments or maxing out your credit line might hurt your scores. But taking modest disbursements and making your payments on time could help your scores in the long run.
What Is a HELOC?
A home equity line of credit is a revolving credit account that's secured by your home.
Similar to a credit card, your account will have a credit limit—the maximum the balance can be at any time. You can then take multiple loans against your credit line and will only pay interest if and when you borrow money.
Unlike credit cards, HELOCs have a draw period and a repayment period. For example, you might have a 10-year period when you can take draws (loans) and make interest-only payments. Afterward, you can't take additional draws and you'll have to repay the outstanding balance, often over a 20-year repayment period.
HELOCs can provide a flexible and relatively low-cost option if you want to borrow money for ongoing projects. You may even want to keep a HELOC open in case of emergencies, although some have annual fees and minimum draw requirements.
How Applying for a HELOC Impacts Your Credit
Applying for a HELOC can affect your credit similarly to applying for other types of credit accounts. The lender will likely check your credit, and a record of the credit check will be added to your credit report as a hard credit inquiry.
New hard inquiries might hurt your credit scores. However, the impact from a single hard inquiry is often minimal and credit scores tend to rebound quickly.
Although multiple hard inquiries could increase the negative impact, credit scoring models also allow you to shop for mortgages—a HELOC is a type of mortgage—without hurting your credit. They do this by treating multiple hard inquiries for mortgages as a single inquiry if the inquiries happened within a short window. This varies from 14 to 45 days, depending on the type of credit score.
Additionally, some lenders offer HELOC prequalifications with a soft credit check. These allow you to find out if you'll likely get approved and see estimated offers without hurting your credit.
How Using a HELOC Impacts Your Credit
Opening and using a HELOC could impact your credit in many ways. Aside from the negative effects of missing a payment, most of these will be minor changes:
- Might thicken your credit file: The lender will likely report the account to all three credit bureaus—Experian, TransUnion and Equifax. It will then appear as an additional tradeline (the industry term for a credit account) in your credit report. If you only have a couple of tradelines, a new account might strengthen your credit file and help your credit.
- Could decrease the age of your accounts: Opening a new HELOC will decrease the average age of your credit accounts, which could hurt your credit scores.
- Can lead to on-time or late payments: Making your HELOC payments on time could help your credit scores, but missing a payment by 30 days or more could hurt it.
- Might add to your credit mix: If you don't have any other revolving credit accounts open, such as a credit card, then the HELOC might increase your credit mix and help your credit scores.
- Sometimes affects your revolving credit utilization: FICO® Scores☉ are designed to exclude HELOCs from credit utilization calculations, but your HELOC's balance and credit limit could affect your utilization for VantageScore® credit scores.
A HELOC could also affect your credit in different ways depending on how you use the account.
For example, if you take out a draw to consolidate credit card debt, your credit scores might increase because you'll have fewer accounts with balances. But if you open and immediately max out your HELOC to pay for home repairs, the high balance might hurt your scores.
Does an Unused HELOC Affect Your Credit Score?
An unused HELOC can still affect your credit scores if the lender reports the account to the credit bureaus. The account's payment history, balance (even if it's zero) and credit limit could all factor into your score.
Some HELOCs may charge you an inactivity fee if you're not using the account. Although this doesn't have a direct impact on your credit score, you might want to contact the lender and see if it will waive or reimburse you for the fee.
How Closing a HELOC Impacts Your Credit
If you close a HELOC that's in good standing, the closed account can stay on your credit reports for up to 10 years. The payment history and age of the account could continue to affect your credit scores throughout this time.
Closing an account could impact your credit scores in more immediate ways, however. For example, if you don't have any open credit cards, the lack of a revolving credit account that has a balance might hurt the credit mix factor in your credit scores. Closing the HELOC could also increase your credit utilization ratio for VantageScore credit scores because you'll have less available credit.
Learn more >> Does Closing a Credit Card Hurt Your Credit?
Benefits of HELOCs
Credit scoring aside, there are a few reasons why you might want to use a HELOC rather than an unsecured personal loan, a credit card or an alternative type of credit account.
- Low interest rates: HELOCs generally have lower interest rates than credit cards and unsecured loan products because they are secured by your home.
- High credit limits: You might be able to borrow more with a HELOC than you could with a credit card or loan. The average credit limit for HELOCs was $117,598, according to Experian data from the third quarter of 2023. Your credit limit could depend on your creditworthiness and how much equity you have in your home.
- Flexibility: HELOCs give you the option to repeatedly borrow against your credit line without having to apply for a new account. There may be an annual fee to keep your account open, but you only pay interest on what you borrow.
- Potential tax benefits: You might be able to deduct interest payments on HELOCs if you use the money to improve your home.
Risks of HELOCs
Even with the benefits in mind, there might be reasons to avoid using a HELOC:
- Reduced equity: Getting a second mortgage, like a HELOC, reduces your equity and could push off the date when you'll completely own your home.
- Risks your home: Using your home as collateral can be risky because lenders may be able to foreclose on your home if you fall behind on your HELOC payments.
- Variable monthly payments: HELOCs tend to have variable interest rates, and your interest rate and monthly payment could change from one month to the next. Your payments may also increase once your draw period ends. You might be able to minimize this risk by getting a fixed-rate HELOC. Some lenders also give you the option of locking in a fixed rate on part or all of your balance from your variable-rate draws.
- Minimum draw requirements: Your HELOC might require you to borrow at least $10,000 at a time, and the balance will start to accrue interest immediately. Alternative options may be easier and cheaper if you're looking for a small loan.
- Potentially long closing time: It might take around two to six weeks to complete the HELOC application and funding process. In contrast, you might be able to get a personal loan in less than a week.
How to Minimize Negative Impacts to Your Credit
Applying for and opening a HELOC might hurt your credit scores a little. But don't let that keep you from getting a HELOC if you think it's the right move. You can minimize the potential negative impacts and use a HELOC to improve your credit scores over time if you:
- Get prequalified with a soft credit inquiry before applying
- Comparison shop for low rates within a 14-day period
- Don't max out your HELOC
- Make your payments on time
- Keep your HELOC open even if you don't use it
Frequently Asked Questions
You might be able to get a HELOC with bad credit, but it depends on the lender and the rest of your financial situation. Having a low debt-to-income ratio (DTI) and lots of equity in your home might help.
Learn more >> How to "Fix" a Bad Credit Score
The required monthly payment on your HELOC could be included in DTI calculations. Many HELOCs only require you to make interest payments during the initial draw period, which is often around 10 years. Your required payments may increase when your repayment period starts, which could also increase your DTI.
Common alternatives to HELOCs include home equity loans—installment loans secured by your home—or a cash-out refinance, when you refinance your primary mortgage for more than the current balance and receive the excess as cash. An unsecured personal loan or line of credit, or a credit card, could also be good alternatives in certain circumstances.
Monitor Your Credit Scores and Offers
Your credit history and score can affect your options and rates whether you're applying for a HELOC, home equity loan, personal loan or credit card. You can check your FICO® Score and credit report for free from Experian and receive complimentary ongoing monitoring and alerts. Experian can also help you find personal loan and credit card offers based on your unique credit profile.