Managing Debt

Does a HELOC affect your credit score?

A father and son give each other a high five outside of their home

Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.

Home equity lines of credit (HELOCs) are a popular way to pull equity out of your home. As a mortgage loan, a HELOC does impact your credit score; however, the type of impact it can have varies from homeowner to homeowner. Learning how HELOCs affect credit can help you prepare and maintain a healthy credit score.

How a HELOC can affect your credit score

Depending on how you use a HELOC, the impact on your credit score could be negative or positive.

  • A HELOC is broken into a draw period and a repayment period with larger monthly payments typically expected during the repayment period.
  • Not making monthly payments on a HELOC may lower your credit score.
  • Using equity from a HELOC to pay off other debt may improve your credit score.

HELOCs affect credit scores in various ways, ranging from how you use cash from a HELOC to your credit mix when you close your HELOC. Learning how a HELOC works could be the first step to help preventing any significant adverse impacts to your credit score.

How does a HELOC work?

A HELOC works more like a credit card than a traditional mortgage. Unlike a home equity loan, you don’t receive a lump sum of cash. Instead, you receive a line of credit that you draw from throughout the draw period, which usually lasts ten years but may differ depending on your lender. The lender typically requires borrowers to pay interest only during the draw period. However, borrowers can make payments toward the principal if they choose to.

Once the draw period is over, the repayment period begins. The term for the repayment period can vary between lenders, but it is typically 20 years. You will make principal and interest payments throughout the repayment period based on your outstanding balance at the end of the draw period and the HELOC’s rate.

Since most HELOCs come with variable rates, rates can adjust as often as every month, impacting monthly payments.

READ MORE: Home equity line of credit (HELOC): Requirements, terms, and repayment

How does a HELOC affect your credit score?

A HELOC can either boost your credit score or pull it down, depending on how you use it.

For instance, someone who doesn’t make their monthly payment on time will have a late payment added to their credit report, which might negatively impact their credit score. However, someone who makes at least the minimum monthly payment on time and in full will have a record of that added to their credit report, and this might help boost their credit over time.

One thing to note is that while HELOCs are a revolving line of credit, there is a possibility that in some cases money pulled with a HELOC might  not impact your credit utilization.

Credit utilization is the total credit you use relative to the total credit you have access to, represented as a percentage. For example, if you have two credit cards with a total of $25,000 in available credit and you currently have $2,500 in charges on your cards, then your utilization would be 10%.

If you have credit card debt that you pay off using a HELOC with this feature, your credit utilization may decrease. Assuming you don’t spend any more money on those cards, using a HELOC this way could potentially help you boost your score. Note that while in some cases credit scores may not factor HELOCs into credit utilization, a HELOC may impact your credit score in other ways.

Does a HELOC hurt your debt-to-income ratio?

As you draw from the account, a HELOC affects your debt-to-income (DTI) ratio. However, if you haven’t tapped into your HELOC and the balance is $0, your HELOC will not likely affect your DTI ratio.

Understanding how a HELOC impacts your DTI ratio can help you prepare if you plan on borrowing money again before paying off the HELOC. For example, if you are in the market for another home some years later, keeping your DTI ratio low may help you secure a better mortgage rate.

Will a HELOC hurt your credit?

As long as you make payments on-time, a HELOC will typically not hurt your credit. While you will have a hard inquiry added to your credit report when you apply for your HELOC, the effects of this are usually short-term. Those with a robust credit profile might not even see a material impact from the hard inquiry.

One of the most obvious ways a HELOC can hurt your credit is if you miss a payment. Like with any other type of loan, missing a HELOC payment will result in a derogatory mark on your credit report. Derogatory marks  could drastically decrease your credit score in a very short amount of time, so it’s important to make your monthly HELOC payments on time and in full.

There may be negative ramifications for those who have thin credit profiles when they close their HELOC. If your HELOC is one of just a couple of accounts on your credit report, there’s a possibility that your credit score  could be impacted t when you close it. Those who only have a HELOC may see their score take a hit when they close out their account.

How to avoid a HELOC hurting your credit score

To avoid a derogatory mark on your credit, make sure you don’t miss a monthly payment. Having several other lines of credit open over time can help you avoid a potential credit score drop when you close your HELOC. Example lines of credit could include credit cards, auto loans, student loans, or a mortgage.

Unfortunately, there isn’t much you can do to keep a hard inquiry from impacting your credit but  having a robust credit profile before you apply may help. However, the effects of a hard inquiry may be overcome with responsible credit use, such as making payments on time and avoiding a high credit utilization, so you shouldn’t let the potential negative impacts from a hard inquiry stop you from applying if you believe a HELOC is the right option for you.

HELOC alternatives

Although HELOCs are a powerful way to borrow against your home’s equity, they aren’t for everyone. Several alternatives allow you to borrow using your home’s equity as collateral, such as home equity loans and cash out refinances.

Home equity loan

Home equity loans are another great way to tap into the equity built up in your home. Like HELOCs, home equity loans are a type of second mortgage. However, home equity loans often come with fixed interest rates, so you can count on a predictable monthly payment every month. Another difference is that home equity loans provide a lump sum instead of a line of credit. As with a HELOC, you can use the cash from the loan for anything you want, from a vacation to home improvements.

Cash out refinance

Cash out refinances are a relatively underutilized way to pull equity out of your home. One  great thing about a cash out refinance is that it  could streamline your existing mortgage payment and cash borrowed from your equity into a single monthly payment.

Cash out refinances differ from a traditional rate and term refinance in the way that you borrow more than the amount of your current mortgage loan, with the difference coming to you in cash. This refinance option can be particularly useful when current interest rates are lower than your existing mortgage or when you have seen the amount of equity available in your home increase over time.

READ MORE: HELOC options & HELOC alternatives

Closing thoughts: How might HELOCs affect your credit score?

Although HELOCs may affect your credit score, that doesn’t necessarily mean their impact will be detrimental overall. So long as you borrow responsibly and make payments on time, your HELOC may help bolster your score and could even increase it over time. If a HELOC doesn’t seem like the right choice, consider a home equity loan or cash out refinance as options for tapping into your home equity.

If you’re interested in an alternative option like a home equity loan, read about how home equity loans work to determine whether it’s the right fit for you.

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