If you have a home equity line of credit (or HELOC), it could be damaging your credit scores without you even knowing it, even if you're making your payments on time. The reason HELOCs can be a problem for your credit rating is because lenders often report them incorrectly to the reporting agencies. Fortunately, this is a problem that can be easily fixed.
Your debt-to-credit ratio, or the amount you borrow versus your available credit limit, is an important component of how your credit scores are calculated. If you have high balances on revolving accounts (such as credit cards), the reporting agencies may view you as "maxed out" and rate down your credit scores - even if you're always on time with your payments.
The following is a list of the major factors calculated into your scores and their weightings from MyFICO.com:
Payment History - 35% Amounts Owed - 30% Length of Credit History - 15% New Accounts - 10% Types of Accounts Used - 10%
Your credit utilization falls under "Amounts Owed", which is 30% of your scores. This is why high balances on revolving accounts can do so much damage to your credit rating even if you pay your bills on time without fail. To avoid trouble in this area, I recommend keeping your balances below 30% of the outstanding limits at all times.
A home equity line of credit is also a revolving account like a credit card because you can borrow from it at your convenience. The primary difference is that it's secured by your home, which means the bank can foreclose if you stop making your payments.
The problem with HELOCs is that they are often reported as revolving accounts instead of mortgages in your credit file. This may not sound like a big deal, but as I mentioned, a high-debt-credit ratio on revolving accounts can ding your credit scores. If your balance on your HELOC is at or near the credit limit, it could look "maxed out" and be doing significant damage to your credit profile.
If you haven't grabbed a copy of your credit report recently, I highly recommend getting it from the federally-sanctioned website AnnualCreditReport.com where you can get it once per year for free. Check to see if your HELOC is being reported as a revolving account instead of a mortgage. If you find that to be the case, be sure to contact your bank and ask them to report it correctly.
Your debt-to-credit ratio, or the amount you borrow versus your available credit limit, is an important component of how your credit scores are calculated. If you have high balances on revolving accounts (such as credit cards), the reporting agencies may view you as "maxed out" and rate down your credit scores - even if you're always on time with your payments.
The following is a list of the major factors calculated into your scores and their weightings from MyFICO.com:
Payment History - 35% Amounts Owed - 30% Length of Credit History - 15% New Accounts - 10% Types of Accounts Used - 10%
Your credit utilization falls under "Amounts Owed", which is 30% of your scores. This is why high balances on revolving accounts can do so much damage to your credit rating even if you pay your bills on time without fail. To avoid trouble in this area, I recommend keeping your balances below 30% of the outstanding limits at all times.
A home equity line of credit is also a revolving account like a credit card because you can borrow from it at your convenience. The primary difference is that it's secured by your home, which means the bank can foreclose if you stop making your payments.
The problem with HELOCs is that they are often reported as revolving accounts instead of mortgages in your credit file. This may not sound like a big deal, but as I mentioned, a high-debt-credit ratio on revolving accounts can ding your credit scores. If your balance on your HELOC is at or near the credit limit, it could look "maxed out" and be doing significant damage to your credit profile.
If you haven't grabbed a copy of your credit report recently, I highly recommend getting it from the federally-sanctioned website AnnualCreditReport.com where you can get it once per year for free. Check to see if your HELOC is being reported as a revolving account instead of a mortgage. If you find that to be the case, be sure to contact your bank and ask them to report it correctly.
About the Author:
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