If you need a large amount of cash – to make improvements to your home, pay off your debts or pay for other large expenses – the main source is the stock you have built up in your home and can be accessed via the domestic capital credit line (HELOC). But before applying for one, you may wonder: Does HELOC affect your credit score? After all, most loans and debts do.
Typically, the impact of HELOC on your credit score is two ways: how lenders report it to the credit department and how they manage their account. “It all depends on how you use it. Keeping your balance low and paying on time can help with your credit score,” explains Linda Bell, senior writer for Bankrate’s home lending team. “Keeping your balance low and paying on time can help with your credit score. However, making the most of your quoted amount or missing out on payments can have a negative effect.”
How you apply for HELOC will affect your credit
When you apply for HELOC, the lender will check your credit score. This “hard pull” or “hard check” can temporarily lower that three digit number. “We’re committed to providing a great deal of support for our clients,” said Jackie Boies, senior director of housing services at Money Management International, a Texas-based nonprofit debt counseling organization.
If you haven’t recently applied for another loan or credit card, the difference in scores should be small. “Overall, a single survey for credit usually minimizes the impact of 5-10 points,” said Suzanne Mink, vice president of consumer lending at Connex Credit Union.
How does using HELOC affect your credits?
Does HELOC affect your credit score after opening? Yes, it can be positive and negative.
HELOC can be reported to the credit viewer in one of two ways, either as an installment loan (i.e. a second mortgage) or as a “rotating account like other credit card accounts.” If reported as the latter, the amount withdrawn may affect credit utilization (see below). However, although it has been reported, your HELOC balance appears under the overall “payment amount” of your credit report. Lenders and creditors use it to determine your total obligations. Lots of debt can draw your credit score.
Credit History/Credit Mix
The amounts outstanding constitute the largest portion (30%) of your FICO credit score, but other factors can be seen in the calculation. So how does HELOC affect credit scores in other areas? Let’s take a look at two notes.
- Credit history length (15%): Financial institutions want to know that you have a track record of managing your money well. If you have a credit that allows you to use your credit for a long period of time and do a good job with it, it will help your credit score. There’s time here. Opening a new credit line can reduce the average age of your account and damage your credit score.
- Credit Mix (10%): Strong borrowers manage their credit type mix well. Having diversity will help you score. You may want to know how your lender will report your HELOC so you can plan accordingly. You already have an installment loan in the form of a mortgage, so it’s generally better for them to report it as a revolving credit account. That being said, if you have a lot of credit cards, it may help your mix so that your mix is reported as an installment loan.
What if I don’t tap Heloc too often?
One factor that determines your credit score is how much of the total available credit (all cards and credit lines) is known as credit usage. The lower the proportion expressed as a percentage, the better the score.
However, HELOCS is the exception. They secure debt (using your home as collateral), so FICO doesn’t take into account your HELOC use when calculating your score, but other measurements like your Vantage score are. Therefore, you will not be able to earn points by not tapping Heloc Balance and will not be punished for maximizing it. In contrast, it is recommended that you do not use more than one-third of the limit on your credit card.
How HELOC improves your credit score
Ensuring your HELOC repayments can help you build your credit by establishing a history of on-time payments. If you don’t have many credit accounts, HELOC will help you establish your credit history and give other lenders more confidence in your ability to pay back what you borrow.
Furthermore, debts related to homeownership tend to be considered “good debt” by credit institutions. Since your HELOC is tied to assets that could increase your net worth, renting your home is often better than taking out a credit card or personal loan, as far as your credit score is concerned.
You can also use HELOC to repay your credit card balance, or improve your score by lowering your credit usage. Ideally, keep this ratio below 30%. FICO specifically excludes HELOCs when calculating credit utilization, so HELOCs can be useful here, but credit cards definitely count towards them.
Let’s say you have a $10,000 limited credit card and currently have a $7,000 balance. When you repay that balance with HELOC, the debt will be transferred from the credit usage rate. This ratio also accounts for one third of your credit score, which helps to give your score a notable bump.
How will closing HELOC affect your credits?
The size of the Heloc balance may not affect your credit score much, but the existence of the balance itself is not the case.
Therefore, closing HELOC can affect your credit score. It can be one of your only installment loans or damage your credit mix to spin your credit account (depending on how your lender reported it).
If a person has a short or new credit history or few credit cards, the impact on their credit score is greater. “Credit history accounts for about 15% of your score,” says Mink. “Longer credit history will help you improve your score.” Keeping Heloc open every month will expand its history.
How to protect your credit score when opening HELOC
By establishing a HELOC, adding new debt to your record can lead to a drop in your credit score first. And if you miss HELOC payments, you’ll definitely get a score.
However, here are ways to mitigate potential damage to your credits when opening HELOC.
- Settle other debts. Some highly balanced open credit accounts can have a negative impact on credit utilization and ultimately reduce your credit score. Try paying off other debts before taking away your HELOC.
- Buy rates and get quotes from various lenders within the window. FICO considers similar inquiries that occur within one month of each other as a single inquiry. This period may vary depending on the credit scoring model used, but it usually ranges from 14 to 45 days.
- Make timely HELOC payments. Your credit score may drop due to missed payments at HELOC. So, payments below the minimum amount are also the same. Depending on the lender, there may be a period of bounty before it is reported to the credit department. The opposite is also true. You can increase your credit score by making timely payments to HELOC.
“Planning is important when using HELOC,” advises Bell. “Start by knowing exactly what you need and setting up a budget to avoid spending. Just borrow something that you can comfortably pay off and keep in mind that interest rates will change.
The ultimate words of HELOC that influence Credit score
Your HELOC has many things in common with credit cards. Applying for a credit score can have a slight impact on your credit score, but it can be a bigger impact if you delay or miss payments. It also affects the length of your credit mix and credit history, which can affect your score.
It’s best to use HELOC for specific needs, such as paying off high-profit credit cards or repairing homes, says Boies. It is wise to use fairness to increase the value of your home, especially if the interest you pay against your HELOC is used to significantly improve your home. HELOC rates tend to be lower than credit card and personal loan rates, which can be a great device for consolidating debts.
“Like all debts, it’s very important to maintain timely payments and develop a great payment history with HELOC,” says Boies. Ultimately, your HELOC may help demonstrate to lenders that you have access to enough funds, but discipline that you should not hit your limits – the very definition of a trustworthy client.
