If you have a home equity line of credit, or HELOC, it could be harming your credit scores even if you make your payments on time. The problem stems from the fact that lenders often incorrectly report HELOCs to the credit reporting agencies. But fortunately, once you're aware of the problem, it's pretty easy to get it 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 rundown of the primary factors used to calculate your scores and the weights they are given, courtesy pf 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 HELOC operates very similarly to a credit card account except for the fact that it's secured by your home. You're free to borrow from it when you please (assuming you have the available credit), but if you stop making payments, the bank will foreclose to get their money back.
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.
To see if your HELOC is being reporting as a revolving account instead of a mortgage, I recommend grabbing a copy of your credit report from AnnualCreditReport.com, the federally-sanctioned website where you can get your credit report for free once per year. If it turns out your HELOC is being misreported as a revolving account, give your bank a call and have them fix it.
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 rundown of the primary factors used to calculate your scores and the weights they are given, courtesy pf 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 HELOC operates very similarly to a credit card account except for the fact that it's secured by your home. You're free to borrow from it when you please (assuming you have the available credit), but if you stop making payments, the bank will foreclose to get their money back.
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.
To see if your HELOC is being reporting as a revolving account instead of a mortgage, I recommend grabbing a copy of your credit report from AnnualCreditReport.com, the federally-sanctioned website where you can get your credit report for free once per year. If it turns out your HELOC is being misreported as a revolving account, give your bank a call and have them fix it.
About the Author:
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