Does a HELOC Adversely Affect Your Credit Score?
September 4, 2006, Reviewed July 17, 2009, February 4, 2011

"Is it true that taking out a HELOC has a negative impact on the credit score? More so then a refinance or second mortgage?"

A HELOC adversely affects your credit score if you are using a large portion of your total line. HELOCs are viewed as revolving credits, similar to credit cards, where there is a balance and a maximum balance. The ratio of the first to the second is used as a measure of financial strength.

The rationale for using the ratio in connection with credit cards is clear cut. Borrowers who max out their credit cards are often in, or heading towards financial distress. The case for using the ratio in connection with HELOCs is weaker, I think, because HELOCs today are often used as a substitute for single-payout mortgages where the total amount is extended at the outset.

Under the existing rules, a one-time pay-out loan does not affect the credit score, only the payment record does. But a HELOC taken out for the full amount at the outset will negatively affect the score at the outset. Then, as the balance is paid down over time, the score will rise.
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