Isroff's HELOC apparently was categorized as revolving debt. When National City froze his account, it effectively reduced his credit limit to the amount owed. To Fair Isaac's black box, it looked like he had maxed out a credit card. Down went the score.
Look at other factorsExcept it's probably not that straightforward, Fair Isaac spokesman Craig Watts says. "I've learned to be skeptical whenever someone says, 'X happened and my score dropped by Y points,'" he says via e-mail. "In cases which we can investigate, very often the change in score was caused by factors other than X that changed on the credit report at the same time but which the observer either overlooked, discounted or didn't realize would also affect the score. For example, many consumers aren't aware that an increase in credit card balances -- while credit limits remain unchanged -- can negatively affect their FICO score."
Around the time that Isroff's HELOC was frozen, he opened a credit card account. That might have dinged his credit score a few points, but not 40.
All kinds of debt not equalIt gets even more complicated. Fair Isaac's scoring model treats installment and revolving debt differently. An installment loan is one in which you borrow a set amount, then repay over time. Primary mortgages and car loans are examples of installment debt. Revolving debt is a credit line that you can borrow against, then repay some or all of it, and borrow again, up to a limit. Credit cards and HELOCs are examples of revolving debt.
But not all HELOCs are scored as revolving debt. When a HELOC's credit limit is above a certain amount, it is scored as an installment loan. That can make a noticeable difference in the credit score, because if you owe 95 percent of an installment loan's original amount, it doesn't count against you, whereas if you owe 95 percent of a revolving account's limit, it does count against you. (In FICO lingo, this percentage is called "credit utilization.")
Fair Isaac won't disclose how high the limit on a HELOC has to be before it's scored as an installment loan rather than as revolving debt. "Sorry, but the threshold built into the FICO scoring model is proprietary information and I can't share it," Watts says. "The threshold also has changed each time we have redeveloped (updated) the scoring model, based on our statistical analysis of consumer behavior and credit risk."
In message boards devoted to FICO scoring, the consensus is that the threshold is in the neighborhood of $50,000. This implies that homeowners can get hit with a double whammy. In Isroff's case, it apparently worked this way: His HELOC with a $100,000 limit was treated by FICO as an installment loan, but when the limit was effectively lowered to $12,000, it was scored as a revolving loan that was charged up to its limit. That took points off the credit score.
3 tips to minimize score damage
- Pay down credit card balances.
- Always pay bills on time.
- Only open new credit lines when needed.
Pay off credit cardsHow do you reduce the impact of a pullback in a HELOC limit? Pay down those credit card balances.
"The surefire way for a consumer to minimize any such implication for his FICO score is for the consumer to habitually keep all credit card balances low, relative to credit limits," Watts says. When combined credit card balances are low compared with the total credit limit, a frozen HELOC will have less impact.
In addition to keeping credit card balances low, Watts advises paying bills on time and taking on new credit only when needed.
As for Isroff, he has paid off and closed his National City HELOC. That hasn't raised his credit score, but he hopes it will soon. He plans to refinance his primary mortgage at a lower rate. Then he will get a HELOC. Not from National City.