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How does a HELOC impact my credit score?

April 28, 2023 | Modified: June 6, 2023

What is a HELOC? 

A HELOC, or Home Equity Line of Credit, is a revolving line of credit that enables you to borrow against the equity in your home. Your home’s equity is the value of the home minus your mortgage or any other liens. A borrower can draw on the line as they need it up to a certain limit. Most interesting, they can use the funds however they’d like. Homeowners often find a HELOC is an effective borrowing option for home improvement projects, tuition expenses, medical expenses, debt consolidation, or a large purchase.

The positive impact of a HELOC on a credit score

  • Your credit score can benefit if regular timely HELOC payments are made. Payment history is the most important factor influencing your credit score. Specifically, it accounts for a whopping 35% of the total score.
  • Building a history of positive, regular payments by using a HELOC for your home improvement or other cash needs over several years can help you build a positive credit history over time. Length of credit history makes up 15% of your credit score.
  • Adding a HELOC to your credit mix can have a positive impact on your credit score. Your credit mix, or the different types of credit you have, accounts for 10% of your credit score. The different types of credit you have might include credit cards, installment loans, retail accounts, and mortgages among others. A diverse mix of loans, such as a HELOC and an auto loan, along with credit cards, can help give your credit score a boost if managed properly.

Negative impact a HELOC may have on a credit score 

  • Missed or late payments can have an immediate negative impact on a borrower’s credit score. Because payment history is such a large part of your credit score, late payments and lack of payment can significantly impact your score. Specifically, paying bills late by 30 days or more can cause your credit score to drop. To combat missing payments, set up auto-pay or calendar reminders to be sure to make all payments on time.
  • Any new credit you apply for affects your credit score. When you first apply for a HELOC, a hard inquiry will appear on your credit report. This will lower your credit score by a few points. The impact will lessen over time. New credit has a 10% impact on your credit score. It’s important to remember this when you are applying for several different forms of credit at once.

Check your credit score! 

Have you checked your credit score recently? You should check it regularly so there are no surprises. Request a free copy of your credit report by visiting AnnualCreditReport.com. Checking your own credit score never impacts your credit score, so put it on your to-do list.

How does a HELOC impact my credit score? 

As we detailed above, a HELOC can impact your credit score either positively or negatively based on how you handle your credit. Falling behind on payments can cause a big drop in your credit score and your overall financial health.

According to the consumer credit reporting company Experian, one common misconception about HELOCs is the balance figures in your credit utilization ratio. As a borrower, you may worry that a high outstanding balance on a HELOC may lower your score. Experian reported that because HELOCs differ from other credit lines in that they are secured by a home, FICO (the credit score most often used by lenders) is designed to exclude HELOCs from revolving credit utilization calculations.

If you are ready to apply for a HELOC, check out the Ultimate HELOC deal at Benchmark FCU.

Learn more about HELOCs by reading the Benchmark FCU blog “Pros & Cons of Using a HELOC for Home Improvement.” 

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