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 proportion of your credit limit that you're borrowing, is a big part of how the credit reporting agencies calculate your scores. If you have balances that are close to or at the limits, the reporting agencies will likely view you as "maxed out" and significantly rate down your scores - even if you've never missed a payment in your life.
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 debt-to-credit ratio falls under "Amounts Owed", which is 30% of your scores. It's obvious that the reporting agencies consider this an important category, so high balances on revolving accounts can do some significant damage even if you make the payments on time. This is why it's important to always keep your balances below 30% of your limits, even if you pay your cards off in full every month.
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 banks often don't report them correctly to the credit bureaus. Instead of reporting them as mortgages, they'll often report them as revolving accounts. Maybe this doesn't sound like that big of a deal, but if you're carrying a balance that's at or near the limit, it could be doing some serious damage to your credit scores.
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 proportion of your credit limit that you're borrowing, is a big part of how the credit reporting agencies calculate your scores. If you have balances that are close to or at the limits, the reporting agencies will likely view you as "maxed out" and significantly rate down your scores - even if you've never missed a payment in your life.
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 debt-to-credit ratio falls under "Amounts Owed", which is 30% of your scores. It's obvious that the reporting agencies consider this an important category, so high balances on revolving accounts can do some significant damage even if you make the payments on time. This is why it's important to always keep your balances below 30% of your limits, even if you pay your cards off in full every month.
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 banks often don't report them correctly to the credit bureaus. Instead of reporting them as mortgages, they'll often report them as revolving accounts. Maybe this doesn't sound like that big of a deal, but if you're carrying a balance that's at or near the limit, it could be doing some serious damage to your credit scores.
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:
Check out three important tips for getting the best mortgage deal for your needs. Also, beware the high credit card balance! A high debt-to-credit ratio can harm your credit scores.
No comments:
Post a Comment