HELOCs & Credit Scores

Credit-Scores-Mortgage Lots of people are now choosing HELOCs for their next mortgage.  HELOCs offer features like:

  • Fully open terms
  • Interest offsetting (where positive savings or chequing balances reduce your debt and interest)
  • Readvancability (i.e.  the ability to re-borrow after you make principal payments)
  • Multiple segregated sub-accounts (to separate different types of borrowing)
  • Interest-only payments

What many don’t realize is that choosing a HELOC instead of a mortgage can have a potentially adverse effect on their credit score.  That’s because HELOCs are often reported to credit bureaus while mortgages are generally not. (In cases where mortgages are reported, sources at Equifax, the nation’s largest credit bureau, say they don’t harm your score).

We recently came across a case where a person’s credit score dropped 80 points after putting their $300,000 mortgage in a HELOC.

Causation is hard to quantify because Equifax doesn’t disclose it’s scoring algorithms, but here are the facts of this particular case:

  • The individual’s score before the HELOC was in the low 700’s. Following the HELOC being reported to the credit bureau, the score fell below 630.
  • There were no other major differences on this individual’s two credit reports (i.e. the report before the HELOC and after)
  • After the HELOC closed, an explanatory note appeared on the person’s credit report stating that his balances were too high in relation to his credit limits.
  • The lender reported the HELOC balance as being 99% of the HELOC limit. (Which is common when the mortgage amount and HELOC limit are similar)

Given that Equifax bases 30% of its Beacon scores on credit utilization and 15% on account age, a brand new $300,000 HELOC, at 99% of it’s limit, is a big potential negative.

Now, an 80 point drop is not catastrophic to some people, but to many others it can be.  80 points is over 10% of the average Canadian’s score.  A drop like that can cause you to no longer qualify for financing on other properties, for financing on consumer loans, for credit cards, and even for getting a job (some employers check credit before hiring).

At the very least, it’s something to keep in mind when comparing lines of credit.  There are a handful of lenders who do not report HELOCs to the bureaus.  If you’re concerned about your score, you’d do well to consult a mortgage professional and consider those options.

  1. I, for long time, have suspected that, as it happened with me, but all the bankers, I talked to about it, said that it should not cause it, in fact, for some strange reason, TD always likes to give HELOCs rather than mortgage. It brought my credit down to 647 from over 700 and after that I converted those HELOCS to open mortgages with Scotia, and it is right back in 700s. So I don’t know if lot of people notice it, but I noticed it.

  2. Hi Renu,
    Thanks for the note. The folks I talked to at Equifax suggested HELOCs are treated somewhat similar to credit cards for scoring purposes. They’re both revolving accounts.
    In a way, it’s common sense, but you don’t think about it until it comes up in practice.
    Cheers,
    Rob

  3. I think it’s strange that not all lenders report HELOCs. They all should IMHO.
    P.S. It’s “principal” not “principle”. :)

  4. I also noticed it when I moved my mortgage from Scotia to a TD HELOC. I had a just around average credit score (I think 680 or so) when I applied for the HELOC. Recently I applied for a SEARS credit card only to obtain the “use your SEARS card” discount on something I was buying. I was shocked when I was declined. I thought “how did my credit rating get so bad that I can’t qualify for a SEARS card”!
    Now I know. I should check out my new credit score.

  5. I don’t think this is entirely true for all Helocs, just some of them. I was told by my broker that some Helocs are seen exactly like mortgages and not even reported to the credit bureau. I believe there is a comparison of all Helocs out their somewhere which shows which ones are reported, and which are not.

  6. FirstLine registers their HELOC like a mortgage…it does not appear on the credit bureau. All other lenders’ HELOCs appear on the bureau.

  7. In Alberta ATB treated their Helocs as mortgages, they are not reported on credit bureau. Now I know if I ever need heloc, I will go to ATB.

  8. Rob, is there a rule of thumb regarding HELOCs with respect to rate premiums over the best (open) non-HELOC mortgages?
    As someone who would not necessarily look to leverage himself with the SM, the flexibility is still appealing. Just curious as to how much this flexibility costs. I imagine there would be a range…
    thanks,
    Al R

  9. Hi Al,
    These days there’s no rule of thumb because the rate market seems to keep changing.
    At the moment, open variables are around 3.05%.
    Open HELOCs range from 3.00% to 3.75% depending on lender.
    Have a great weekend!
    Rob

  10. I was told that banks don’t really care unless your credit score falls below 600. So, you won’t be able to negotiate better mortgage rates, for instance, with a higher score than 600. As long as you hit the minimum, you will get the best rate.
    Is this true?

  11. Hi Kerri,
    600 is the general minimum to qualify for an insured mortgage. However, lenders with the best rates often require notably higher scores. Once your score gets to 680+ you can usually get the best rates at over 95% of lenders.
    Cheers,
    Rob

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