Home LoansHome Equity Loans

LendingTree Study Finds New Home Equity Loans Don’t Have a Notable Impact on Credit Scores

For the last several years, home prices have been steadily climbing. As a result, homeowners are now sitting on a record-high $18.7 trillion in equity — the highest amount since the data was first recorded in 1945. 

Home equity may be a helpful financial tool that homeowners use to pay for home renovations, help a child with college expenses, launch a business or consolidate high-interest debt, to name a few options. Although homeowners are sitting on record amounts of home equity, they aren’t rushing to tap it. In fact, home-equity borrowing in 2019 hit the lowest level in more than 15 years, according to government data. 

While there are multiple reasons for this, including tightened lending standards from banks and fear of overleveraging home equity, borrowers need not be afraid that tapping into their home equity could hurt their credit scores, at least not in the long term.

LendingTree analyzed more than 2,100 consumers in the nation’s 50 largest metros to look at what happens to borrowers’ credit scores when they take out a home equity loan. We found that while borrowers did see a decline in their credit score, it was relatively small and that their credit scores usually recovered within a year of tapping their home equity.

Key findings

  • Borrowers across all 50 of the nation’s largest metros saw an average decline of 17 points in their credit score in the months following a home equity loan. At the high end, scores declined by 26 points in Detroit and Salt Lake City. The smallest decline was six points in Jacksonville, Fla
  • The average borrower looked at in our study had a credit score of 725 before taking out a home equity loan. The highest average starting credit score was 739 in San Jose, Calif., while the lowest was 702 in San Antonio. In general, average credit scores were high enough that a drop of 10 to 20 points would not likely have a big impact on cost or accessibility to credit. 
  • Credit scores took an average of 176 days, or about six months after closing on a home equity loan, to reach their lowest point. Oklahoma City homeowners saw their credit scores reach their lowest points the fastest with an average time of 115 days. The longest decline was for homeowners in Milwaukee at 224 days
  • Scores took an average of 175 days to recover to their pre-loan levels from their lowest point. The quickest time to recover was 118 days in Oklahoma City. Borrowers in Birmingham, Ala., had the longest recovery time at 245 days. 
  • On average, scores tend to fully recover to their pre-loan average within a year. The complete cycle to return the credit score to its former position before the home equity loan takes an average of about 350 days. The shortest cycle was in Oklahoma City at 233 days and the longest in Birmingham, Ala., at 417 days. 

Metros with the smallest credit score decline after getting a home equity loan

No. 1: Jacksonville, Fla.

  • Average initial credit score: 714
  • Average decline in score: 6 points
  • Total time until recover: 306 days 

No. 2: Pittsburgh 

  • Average initial credit score: 722
  • Average decline in score: 9 points
  • Total time until recover: 358 days 

No. 3: Memhpis, Tenn.

  • Average initial credit score: 715
  • Average decline in score: 10 points
  • Total time until recover: 359 days 

No. 4: Cincinnati 

  • Average initial credit score: 719
  • Average decline in score: 11 points
  • Total time until recover: 280 days 

No. 5: Raleigh, N.C.

  • Average initial credit score: 724
  • Average decline in score: 11 points
  • Total time until recover: 359 days 


Metros with the largest credit score decline after getting a home equity loan

No. 1: Detroit

  • Average initial credit score: 709
  • Average decline in score: 26 points
  • Total time until recover: 348 days 

No. 2: Salt Lake City 

  • Average initial credit score: 718
  • Average decline in score: 26 points
  • Total time until recover: 324 days 

No. 3: Dallas 

  • Average initial credit score: 715
  • Average decline in score: 23 points
  • Total time until recover: 397 days 

No. 4: Charlotte, N.C.

  • Average initial credit score: 722
  • Average decline in score: 22 points
  • Total time until recover: 353 days 

No. 5: Oklahoma City 

  • Average initial credit score: 729
  • Average decline in score: 22 points
  • Total time until recover: 233 days 

Why home equity loans affect credit scores

When a consumer takes out a home equity loan, that adds a large balance or credit line to their credit report. Credit scoring agencies consider the total amount of money a consumer owes, and a large increase in outstanding debt drives scores lower. The presence of a new credit line item also weighs on the score, though to a lesser extent.

As time passes, making on-time payments helps borrowers improve their credit score as they show they’re managing their new home equity loan account well. If it’s a home equity line of credit and the borrower does not use the full credit line, their credit utilization ratio falls, which may boost their credit score. Having a home equity loan also increases the diversity of accounts in the credit file, which could boost the score as well. Eventually, the score returns to its pre-loan level and, in some cases, surpasses it.

Improving your credit score after accessing your home equity

Taking out a home equity loan will almost certainly have a short-term negative impact on your credit score, but you can focus on other areas of your credit profile to bolster your credit score. Keep your current credit card balances low, and avoid applying for other forms of new credit. Use as little of your available credit as possible. The closer you get to maxing out your credit cards or your HELOC, the more your credit score will drop. Finally, make on-time payments for all your debts (including your home equity loan) to improve your score and show responsible credit usage.

Methodology

To determine how taking out a home equity loan affects credit score, we used LendingTree’s proprietary financial intelligence platform, My LendingTree, to look at more than 2,100 consumers who lived in one of the U.S. 50 largest Metropolitan Statistical Areas (MSAs) and took out home equity loans homes in 2018. 

We tracked the credit scores of these consumers through 2019 to see how many days it took until the score returned to its pre-loan level. 

Note that in this study, we’re broadly referring to both home equity loans and home equity lines of credit (HELOCs) as home equity loans.

LendingTree research analyst Jacob Channel contributed to this report.

 

Compare Home Equity Offers