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How applying for a HELOC affects your credit
When you apply for a HELOC, the lender will , which has the potential to temporarily lower it. However, if you haven’t applied for other credit recently, the impact will be minimal, says Jackie Boies, senior director, Partner Relations at Money Management International, a Texas-based nonprofit debt counseling organization. “The inquiry will remain on your credit report for two years, but generally only impacts your credit score for about six months,” says Boies. “Overall, a single inquiry for credit will have minimal impact, typically five to 10 points,” says Suzanne Mink, assistant vice president of Consumer Lending at Connex Credit Union. Multiple inquiries from , or lenders within a short time period don’t have a large impact on a credit score. However, if you decide to compare interest rates and fees over a longer period of time, several hard inquiries could be harmful to your credit score, says Mink.
How using a HELOC affects your credit
Once you’re approved for a HELOC, the loan backed by your home will be reported like other revolving credit, such as a credit card, instead of like a second mortgage. “A HELOC is an open line of credit and subject to being used in the same manner [as a credit card],” says Boies. “As with all debt, it will be very important to maintain timely payments and develop an excellent payment history on your HELOC.” Like a credit card, with a HELOC, you can take money from the loan when you need to and make only minimum payments during the draw period. “That’s why a HELOC is listed as a revolving account like your other credit card accounts,” says Mink. “The credit report will show the HELOC balance, credit line and payment history.” Unlike a credit card, the amount of the available credit used from the HELOC is not considered when determining your credit score when you’re seeking another loan. You can, however, toward your HELOC. What happens to your credit score if you don t tap the HELOC very often
One factor in determining your credit score is how much of your total available credit you’ve used, known as . Your credit score can increase if the HELOC goes untapped and there is a large amount of available credit.
How closing a HELOC affects your credit
Closing a HELOC can impact your credit score, especially if you don’t have much credit available elsewhere. “Closing a HELOC will reduce one’s available credit and could have a negative impact if the percentage of revolving balances breaches a certain percentage,” says Matt Hackett, operations manager of Equity Now, a New York-based direct mortgage lender. For instance, if you have a HELOC for $10,000 and close the account after it is paid off, that means the $10,000 of available credit is no longer being factored into your credit score. The impact to a credit score will be greater if the person has a short credit history, is relatively new to credit or has few credit cards. “Credit history makes up about 15 percent of your score,” says Mink. “A longer credit history will help to improve your score.” Each month you keep the HELOC open extends your credit history.
What to do to minimize any negative effects on your credit
Some actions could help minimize any negative effects on your credit when you take out a HELOC: Resolve other debts. Several open credit accounts can negatively impact your credit utilization ratio, which will ultimately bring down your credit score. Try to pay down other debt before taking out a HELOC. Shop rates and get quotes from different lenders within a 45-day window. FICO considers similar inquiries that have occurred within 45 days of each other as a single inquiry. This time period might vary depending on the credit scoring model used, but it’s typically between 14 and 45 days. Make timely HELOC payments. A missed payment on your HELOC is likely to cause your credit score to drop. Depending on your lender, there might be a grace period before it’s reported to the credit bureaus. Bottom line
It’s best to , such as paying off high-interest credit cards or , says Boies. Using equity to increase the value of your home is smart, especially since the interest you pay on your HELOC might be if you use the funds to substantially improve your home. Since HELOCs tend to have lower interest rates than credit cards or , they could make the most financial sense. SHARE: Ellen Chang is a former contributor for Bankrate. Chang focused her articles on mortgages, home buying and real estate. Her byline has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers.