Home Equity Line of Credit (HELOC) is a popular means of credit in Canada. Simply put, it is a type of loan that allows homeowners to borrow money against the equity of their home (More on this later in the blog!). HELOCs are witnessing a sustained rise in their popularity. People borrow in the form of HELOC for home renovations, improvements, debt consolidation and a host of other purposes. After all, the loan has much to offer. It’s flexible, more affordable and eligible for tax deductions. Amid the HELOC discussions, however,  there has been one persistent question: Does HELOC affect credit score? Well, the short answer is yes. A detailed response is this blog. 

We explore and unravel the relationship between HELOC and credit ratings. Credit scores play an important role in an individual’s financial image in the market. As you walk through this blog, you’ll learn the ways HELOC affects credit scores and find practical tricks to make the most of it. But before we take any step forward, let’s tread a few steps backwards. Let’s begin with a quick revision. 

What’s HELOC Really & How Does it Function?

What’s HELOC Really & How Does it Function?
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Definitionwise, HELOC is a form of credit that’s given to homeowners against the equity they own in the house. Let’s say a house is worth $300,000, and you still owe $100,000 in your mortgage. In this case, your equity, the actual portion of the home owned by you, would be $200,000. Metaphorwise, HELOC is much like a credit card. There is a maximum limit – you can borrow against it, pay it back, and borrow again up to the limit. And you only pay interest on the amount you borrow. However, unlike a credit card, a HELOC is secured by your home as collateral, which typically allows for a higher credit limit and lower interest rates. This security aspect explains the rising popularity of HELOCs. 

Now that we’re done with the recap, back to the main question – will HELOC hurt my credit? Well, from application to closure of a HELOC account, there is some impact on the credit score inn one form or the other. Let’s walk through each of these stages, in rising degrees of impact on the score and find  how does a HELOC affect credit score?

How Does the HELOC Application Affects Credit Score?

When you apply for a HELOC, the lender conducts a hard credit check to evaluate your creditworthiness. Although a common practice, this check can temporarily lower your credit score by a few points. According to experts from sources like Money Management International and Connex Credit Union, this type of inquiry might drop your score by 5 to 10 points. It can stay on your report for two years, though its impact on your score generally fades after about six months. Further, if multiple inquiries are made within a short span of time, they’ll be grouped together, causing less harm. However, if it happens for a longer duration, there might be a significant impact on your credit score.

How Does HELOC Affect Credit Score?

How Does HELOC Usage Affects Credit Score

Does HELOC affect credit score once it is approved? Yes, it does. Once you secure a HELOC, how you use it can either be beneficial or detrimental to your credit score. HELOCs are revolving lines of credit, similar to credit cards, with a credit limit you can draw against as and when needed. Drawing heavily against your HELOC increases your credit utilisation ratio, which is the amount of credit used vis-a-vis what’s available. A high utilisation rate signals potential over-leverage and can negatively impact your credit score. On the flip side, having a large portion of unused HELOC can result in a lower credit utilisation ratio and result in better credit score. 

Quick Tip: Aim to keep credit utilisation below 30% to get the maximum benefit on your financial image. 

How Does Closing HELOC Account Affects Credit Score?

Once you pay off your HELOC credit, there may be a reduction in the total credit available to you. This reduction can increase your credit utilization ratio, potentially lowering your credit score. The dip in the score might be for a short, temporary span of time. Additionally, borrowers with a short credit history are likely to have a greater impact on their credit scores. As a general rule of thumb  – the longer the credit history, the better the credit scores.

Things to Do with Your HELOC Account 

One way or the other, HELOC is going to impact your credit score. Here are some quick tips for using HELOC in a way that improves your credit scores:

    • Make Timely Repayments: Always pay on time. This builds a solid credit history and might yield benefits like grace periods from the lender.
    • Maintain a Low Credit Utilization Ratio: Use a small portion of the available credit to show responsible usage. Keeping the ratio under 30% is beneficial for your score.
    • Long-term Credit History: An older HELOC account with a positive payment record enhances your credit profile by extending your credit history.
    • Debt Consolidation: Using a HELOC to consolidate and pay off other debts can improve your score by managing multiple debts more effectively and at a lower interest rate.

Things Not To Do With Your HELOC Account

Avoiding these common pitfalls will help minimise HELOC’s negative impact on your credit score. Here are some things not to do:

    • Do Not Max Out Your Credit Limit: Utilizing your entire HELOC limit increases your credit utilisation ratio. Its best to use it strictly on a need basis to ensure efficient credit usage. 
    • Do Not Neglect Financial Monitoring: Failing to regularly review your financial situation can lead to overspending.  Stay proactive in managing your finances to avoid harming your credit score.
    • Do Not Accumulate Multiple Hard Inquiries: Frequent applications for new credit can hurt your score. If shopping for rates, consolidate credit inquiries within a 14 to 45-day period to minimise their impact.

Summing Up

HELOC is, without a doubt, a solid financial tool in itself. It is, however, its ultimate usage that determines how HELOC affects credit score. Either way, opening a HELOC account is going to impact your credit score. The smarter thing to do, then, is to ensure efficient credit practices to minimise the negative and facilitate the positive impact. And here’s the thing – what you can’t control, you manage! So, be mindful of your credit utilisation and start managing your credit score better with the HELOC practices discussed above.

You May Also Read :

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All About HELOC in Canada

HELOC in Canada

Frequently Asked Questions (FAQs)

What will the monthly payments be for a $50000 HELOC?

Monthly payments for a $50,000 HELOC depend on the interest rate and amount drawn and typically involve interest-only payments during the draw period.

Is HELOC a cheaper form of credit than a term loan?

A HELOC may offer lower interest rates than unsecured loans because it is secured by your home, which acts as a collateral.

What are the alternatives to HELOC?

Alternatives like home equity loans, personal loans, or refinancing are also available depending on your financial requirements.

What’s the difference between HELOC and home equity loans?

A HELOC provides a flexible credit line with variable rates, while a home equity loan offers a fixed sum with set monthly payments and typically fixed interest rates.