Will paying off my HELOC hurt my credit score?

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Q. Will paying off and closing my home equity line of credit affect my utilization ratio on my credit score?
— Credit-aware

A. There are many moving parts to your credit score, including your utilization ratio.

The utilization ratio is a comparison of how much credit is available to you and how much credit you’re actually using – your outstanding balances.

It’s important to understand how your credit score considers your home equity line of credit (HELOC).

In many ways, HELOCs are similar to credit cards, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“There is a revolving line of credit that you can borrow from, pay down and borrow from again, as needed,” he said. “There is a minimum payment every month, and interest is only incurred if you do not pay your balance in full each month.”

Just like with a credit card, missing even one HELOC payment will negatively affect your credit score, Green said.

For this reason, many people assume that credit cards and HELOCs are handled the same way on our credit report, Green said, but that’s not the case.

While there are many similarities, there are also major differences.

Besides payment history, the biggest factor at play when determining your credit score, is the amount you currently owe in relation to your credit limits – the utilization ratio.

Ideally, you want to keep your utilization ratio below 30 percent of your overall credit limit, Green said.

Here’s where a HELOC is different. The credit line is secured by your home, and if you default on the loan, then the lender can take your house because it’s been as collateral, Green said.

As such, HELOCs are not counted when credit scoring models calculate the revolving utilization ratio on your credit card accounts, he said.

“Since HELOCs are not considered a credit card account, they do not affect your utilization ratio,” he said. “You may already know that maxing out your credit card will make your utilization ratio go through the roof, but when you max out your HELOC, it does not have the same effect.”

Green said that doesn’t mean you want to max out your HELOC because it would probably eat into your cash flow and make it difficult to keep up with minimum payments.

So in the end, Green said, by paying off and closing your HELOC, you will neither be helping nor hurting your utilization ratio.

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This story was originally published on June 27, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.