If you have a HELOC, or home equity line of credit, it could be causing damage to your credit scores without you even knowing it - even if you make your payments on time. The issue is that lenders often report HELOCs to the credit bureaus incorrectly, but fortunately, the problem can be fixed with little difficulty.
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 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 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 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 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 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:
Does running my credit really hurt my scores? Get real deal on how credit inquiries can effect your credit scores. Don't risk your next mortgage deal with these common credit mistakes. Learn about important credit do's and don'ts when applying for a mortgage.
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