Does the Payoff of HELOC Early Affect Credit?

HELOCs are mortgages that work like credit cards.
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Credit activity of any kind can have an affect on your credit score because the major credit bureaus revise your score when balances change as well as when you open and close accounts. When you pay off a home equity line of credit, different credit scoring factors could cause your score to rise or fall.

Home Equity Credit Line

When you set up a HELOC, a lender gives you access to a sum of money that is secured by your home. Credit bureaus classify HELOCs as revolving debt products because you can use a HELOC multiple times in the same way that you use a credit card. However, credit cards are open-ended products, whereas HELOCs have a set term that may last for up to 30 years. When the HELOC term comes to an end you must pay off any residual balance.


Credit bureaus track the balances that you keep on HELOCs and credit cards. Your credit score drops when your utilization of available credit rises. Therefore, your credit score should improve when you pay down your HELOC. However, payment activity also affects your credit score. If you have no balance, you have no payments to make and this could cause your score to drop slightly. In terms of your credit score, it's actually better to keep a very small balance on your HELOC than to have no balance at all.


When you pay off your HELOC, your lender gives you the option of closing the line or keeping it open until the end of the HELOC term. Credit scores are partly based on your average length of account history. If you pay off and close your HELOC, your average length of account history decreases. The longer your average length of account history, the higher your credit score because credit bureaus raise your score over the course of time when you prove that you can comfortably handle your credit accounts. Therefore, if you close your zero balance account you could see your credit score drop.


In terms of your credit score there are benefits to keeping your HELOC open, but there are also potential downsides. Some banks charge annual maintenance fees on HELOCs and you avoid this cost if you pay off and close the account. If you forget about these fees you may miss a payment, in which case you could really hurt your credit score. Also, even if you pay your balance off, the lien on your home remains in place if you don't instruct the bank to close the line of credit. You can't sell your home or do a cash-out refinance while the zero balance HELOC remains active.

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