Does Unused Heloc Affect Credit Score?

How Does an Unutilized HELOC Affect the Credit Rating?

A HELOC is a type of credit that is obtained by using the home equity that has been accumulated through paying off the mortgage. It operates like a credit card in that one is given a certain amount of money that they can spend as per their wish.

HELOCs often come with adjustable rates and consumers only have to pay interest on the amount they borrow and not the available credit. Due to this, they are used in funding home improvements, medical expenses, college fees, and other expenses.

But, do you know how HELOC affects your credit status, more so when you never used it? Here is the information list.

How HELOCs Impact Credit Scores?

When you open a HELOC, you experience a small, temporary, but real decline in credit scores due to a hard pull. The drop’s quantity depends on your credit but is generally between 5 to 15 points.

Credit score – If you have good or better credit, then the hard credit check will not significantly affect your credit score. However, if your credit profile is fairly or poorly rated it will cause them to drop more.

The other component of credit score is the credit utilization ratio, which compares the total amount of credit used to the total amount of credit available. As you open a HELOC, the total credit line increases therefore; there is a reduction in the credit utilization ratio providing other accounts are not overcrowded with balances. On this aspect, there is an increase in scores.

After the HELOC has appeared on your credit reports, it will affect the credit history length and the variety of accounts, which both contribute to increasing scores.

In total, opening a HELOC has a minor negative effect on scores initially, but a non-negative effect in the long run.

How HELOC Unused Impact Credit?

If you establish a HELOC but never use it, this unused credit is not beneficial or detrimental to your scores. As long as you do not continue to incur charges on your revolving credit, having an inactive HELOC does not affect your credit score at all.

However, having the HELOC open does provide you with a larger overall credit limit. Therefore, if you did need to take on some debt for any reason, having that available credit would not cause your utilization ratio to rise and hurt your scores.

In that regard, an unused HELOC is a safety net that shields your credit score. If you do not have the temptation to borrow money that you will not be able to pay back, this is a good strategy to avoid your scores from being lowered.

What Does Unused HELOC Assistance Credit?

Just maintaining an unused HELOC line does not enhance your credit in any significant manner. Creditors and scoring models pay more attention to how you handle the debts that you already incurred. An inactive account does not portray you in a good book or bad book concerning your repayment behavior.

As for that, it is more credit-worthy to have a high credit limit with small balances in it rather than to have a small credit limit. An increase in your total available credit means that your credit utilization can remain low as you use some of the HELOC or other revolving credit.

Let me illustrate this – if you had a $100,000 HELOC and charged $10,000 to credit cards, your utilization would be 10%. However, without the HELOC, that $10,000 balance spread across a smaller pool of credit would translate to a higher figure, say 40%. In fact, the lower the utilization the better it is for your scores.

The only drawback that can be mentioned here is that credit scoring models do penalize you once you get access to too much credit. Therefore, open-ended lines should not be in tens, or even scores. Just as with a credit card, as long as the total credit built up from a HELOC is not too large compared to the person’s income, any unused credit can contribute to building up credit scores over time.

Drawbacks of Unused HELOC

While an inactive HELOC doesn’t overtly damage your credit, there are some potential drawbacks.

Interest and fees reduce equity built up: Common HELOC features include an annual or monthly fee. If you don’t use the line, those recurring costs are added to your loan balance, slowly reducing home equity over time.
Prepayment penalties may apply: Some HELOC lenders allow you to prepay a particular balance for a lower interest rate, but they have prepayment penalties. This might reduce your options if you use the credit and later decide to pay it off early.
Could tempt overspending: It has often been seen that easy availability of credit does sometimes lead to over-extension. On the psychological side, having an unused HELOC for a rainy day is bad news, and you might find yourself sinking into a pit of debt.
Susceptible to freezing or lowering limits: Issuers can freeze or reduce the HELOCs with short notice, especially during economic downturns or housing declines. This could reduce your cash reserves when you need emergency financing the most.
Lien attached to home: Like with mortgages, HELOCs place a security interest on your home. Which ties more general default risks to your property that severe credit impairments could worsen.

As such, an unused HELOC does not have direct credit consequences that one needs to worry about, but the indirect consequences mean that one needs to think twice before applying for a HELOC with the sole aim of improving your credit score.

Alternatives to Inactive HELOC

If your goal is to raise your total available credit to keep utilization low, there are alternatives to an unused HELOC to explore first.

Request credit line increases on existing cards: That means as long as you have a history of responsible usage, most issuers will grant an increase in the limit, with no need for a new credit check.
Open a new credit card: Just applying for one new card can increase your total credit access much faster than a HELOC but without collateral risk. Bonuses that feature a 0% introductory APR are ideal because they enable one to use the higher limit appropriately.
Become an authorized user: Being added as an authorized user to an older credit card belonging to a spouse or a family member also offers a credit history advantage even without using the card. It also increases your overall credit limit.
Use credit builder loans: Credit builder loans can be said to operate similarly to secured savings accounts. You use an amount the lender credits for you and repay it in portions to indicate proper utilization that is reflected in the credit reference agencies.

Nevertheless, if you do qualify for and open a HELOC, it is prudent to move forward cautiously. It is advised to forego any flashy rewards programs for an outright spending cap below your authorized amount, automatically making the bare minimum monthly payment no matter how much you owe, and check your credit reports and FICO score regularly to catch any unpleasant surprises.

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