home equity

Is my HELOC like a credit card account?

Janna HerronDear Credit Card Adviser,
Why does the second mortgage on my house show up as credit card debt on my credit report instead of a mortgage? I have paid off all my credit cards except one, which I will pay off in three months. The second mortgage will be my only debt, but it lowers my credit score because it's just less than $30,000, even though I'm making two payments a month.
-- Carol

Dear Carol,
It sounds like your second mortgage is probably a home equity line of credit, also known as a HELOC. This is a revolving credit line that is secured by your home equity. You can make charges against the credit line, carry a balance from one month to the next and make minimum payments, just like a credit card.

That is why a HELOC is listed as a revolving account and looks like a credit card account on your credit report. The credit report will show the HELOC's balance, credit line and payment history.

A second mortgage -- in the traditional sense -- is a home equity loan. This is an installment loan secured by your home equity and requires fixed monthly payments over the life of the loan. A home equity loan would be reported as either a mortgage or an installment loan on your credit report.

You're right that a HELOC affects your credit just like any credit card account or other loan. What's surprising is how it affects your FICO credit score. How much of the available credit you use on your HELOC is not considered by the FICO score, a stark difference from a credit card.

Credit scores consider how much you charge on your credit cards versus how much credit is available to you. That's called your utilization rate. The key is to keep your utilization rate below 20 percent for each credit card account and for all accounts in total.

That means if you have a $1,000 credit limit on one card, don't charge more than $200 on it. If all of your cards have a total of $5,000 in credit limits, don't charge more than $1,000 on them combined.

However, the utilization rate only applies to credit cards. HELOCs aren't considered revolving accounts by FICO, even if they look like them on a credit report, says Anthony Sprauve, spokesman for myFICO.com, the consumer education division of FICO.

"Research has shown they are more like a mortgage than a credit card in terms of their predictiveness," he says.

However, your payment history on a HELOC definitely plays a role in your FICO credit score, Sprauve says. The good news is that you are making payments; and that accounts for 35 percent of your credit score. The fact that you're making two payments per month doesn't help or hurt your credit score, as long as you're making the minimum payment on time every month. That goes for all loans.

But if your goal is to be debt-free rather than apply for a new loan, you shouldn't worry too much about your credit score since you won't need it. However, if you think you may need to apply for a new loan sometime in the future, remember that managing no debt doesn't boost a credit score. Good luck!

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To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page and select "Credit Cards." Read more columns by the Credit Card Adviser. Follow Janna Herron on Twitter.

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