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 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 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 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.
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 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 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 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.
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:
Read 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.
0 comments:
Post a Comment
Don't use active link, spamming, phising or making chaos