How Does a HELOC Affect Your Credit Score?

Will Opening a HELOC Affect My Credit Score?

A HELOC is a home equity line of credit. HELOCs are different from other home equity loans because they are open credit lines that are available for homeowners to take out an amount of money that they might need. On a credit report, HELOCs are usually listed as revolving credit, like a credit card, and not as a second mortgage. Too many open lines of credit can affect the average length of your credit history, which could potentially reduce your credit score.

With a HELOC, you decide how much equity from your home to use. For example, if you have $100,000 available in equity, the lender will set up a revolving account, so you can take out as little or as much of that $100,000 as you need, and you can use it for any expenses you wish. It's important to manage the amount of credit you have since a HELOC typically has a much larger balance than a credit card. It may also be a good idea to pay off your other credit card balances with the HELOC, so you only have one balance to manage.

Does a HELOC Hurt My Credit Score?

Whether a HELOC helps or hurts your credit score after you’ve successfully applied is dependent on how you manage your payments. A HELOC has a variable interest rate, which means payments can increase when interest rates rise and decrease when interest rates fall. This variability can make it challenging to budget when you don’t know what your payments will be in the future. If you’re not able to keep up with a higher payment, this could negatively affect your credit score. Like with any bill or monthly payment, if you make your payments on time, consistently, you can improve your credit score.

Keep in mind that if you use all of your available credit, you don't have room for unexpected expenses, like a medical issue, leaky roof, or car repair. You wouldn’t want to max out your credit cards, or your HELOC, and then have no emergency source of funds.

Will Closing a HELOC Affect My Credit Score?

Part of your credit score is determined by your credit utilization, which is how much credit you are using. However, if you have other credit lines aside from a HELOC (like credit cards), then closing it may have minimal effect on your credit score. Another reason to close the HELOC—if you don't need to take any more money out or if you pay off the balance—is that it will close out the lien on your home that a HELOC puts in place as collateral. If you want to sell your home and purchase another, then you would first need to close out the HELOC.

Freedom Mortgage is not a financial advisor. The ideas outlined in this article are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions and consult a tax advisor regarding tax implications and the deductibility of mortgage interest.

Last reviewed and updated October 2024 by Freedom Mortgage.