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 credit utilization ratio, or the amount you borrow versus your available credit limit, is a key part of how your scores are calculated. If you have balances at or near the limits on revolving accounts such as credit cards, you'll be viewed as "maxed out" by the reporting agencies and your scores could suffer - even if you never miss a payment.
The following list, which is from MyFICO.com, shows the main criteria the reporting agencies use to calculate your scores and the weight they are given:
Payment History - 35% Amounts Owed - 30% Length of Credit History - 15% New Accounts - 10% Types of Accounts Used - 10%
Your debt-to-credit ratio is categorized under "Amounts Owed", which makes up a whopping 30% of your scores. This is the reason that maxing out your credit cards can do so much damage to your scores even if you pay your bills on time. To stay out of trouble in this area, it's super important that you keep your revolving balances below 30% of the limits.
A HELOC is also a revolving account that operates very similarly to a credit card, but of course, the major difference is that it's secured by your home. If you stop making payments on your HELOC, the bank has the right to foreclose to recover their money.
The problem with HELOCs is that banks often misreport them to the reporting agencies as revolving accounts instead of mortgages. This might not sound like a big deal, but remember what I said about having a high balance on revolving accounts? If you owe more than half of your credit limit on your HELOC, and it's reporting as a revolving account instead of a mortgage, it could be dragging down your scores.
If you haven't recently obtained a copy of your credit report, I highly recommend visiting AnnualCreditReport.com, the official federally-sanctioned website where you can get a free credit report once every year. Check to see how your HELOC is being reported; if it's showing up as a revolving account instead of a mortgage, give your bank a call and have them report it correctly.
Your credit utilization ratio, or the amount you borrow versus your available credit limit, is a key part of how your scores are calculated. If you have balances at or near the limits on revolving accounts such as credit cards, you'll be viewed as "maxed out" by the reporting agencies and your scores could suffer - even if you never miss a payment.
The following list, which is from MyFICO.com, shows the main criteria the reporting agencies use to calculate your scores and the weight they are given:
Payment History - 35% Amounts Owed - 30% Length of Credit History - 15% New Accounts - 10% Types of Accounts Used - 10%
Your debt-to-credit ratio is categorized under "Amounts Owed", which makes up a whopping 30% of your scores. This is the reason that maxing out your credit cards can do so much damage to your scores even if you pay your bills on time. To stay out of trouble in this area, it's super important that you keep your revolving balances below 30% of the limits.
A HELOC is also a revolving account that operates very similarly to a credit card, but of course, the major difference is that it's secured by your home. If you stop making payments on your HELOC, the bank has the right to foreclose to recover their money.
The problem with HELOCs is that banks often misreport them to the reporting agencies as revolving accounts instead of mortgages. This might not sound like a big deal, but remember what I said about having a high balance on revolving accounts? If you owe more than half of your credit limit on your HELOC, and it's reporting as a revolving account instead of a mortgage, it could be dragging down your scores.
If you haven't recently obtained a copy of your credit report, I highly recommend visiting AnnualCreditReport.com, the official federally-sanctioned website where you can get a free credit report once every year. Check to see how your HELOC is being reported; if it's showing up as a revolving account instead of a mortgage, give your bank a call and have them report it correctly.
About the Author:
Learn three important tips for getting the best mortgage deal for your needs. Also, beware the high credit card balance! A high credit utilization can seriously damage your credit scores.
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