home equity

HELOC activity may affect FICO score

Don Taylorq_v2.gifDear Dr. Don,
Will it affect your credit score if you have maxed out your home equity line of credit? I have been told in the past that a HELOC is like a credit card when they issue your FICO score.
-- Abby Aggregate

a_v2.gifDear Abby,
I asked Craig Watts, the public relations senior manager at Fair Isaac Corp., to explain how your credit score is impacted when you max out your HELOC.

Here's what he had to say:

"Most likely, it will affect your credit score. The FICO score is designed to treat a HELOC rather like a revolving line of credit if the loan's limit is below a preset amount, and like an installment loan if the loan's limit is above that amount. We find that this is the fairest and most accurate way to incorporate HELOCs into score calculations. To manage any HELOC well, the borrower should use the same good credit habits that build a high FICO score: pay bills on time without exception, keep balances low and take on new credit only when it's really needed."

Your question prompted me to ask Watts some related questions. Here are those questions and his replies.

Tricky business
  • Does credit utilization of a HELOC negatively impact a credit score? As with any loan or revolving account, using a HELOC account will impact the person's FICO score, but often the amount of impact is small. That impact can be positive or negative depending on a variety of things, including the account balance, payment status and what other information is on the credit report.
  • What happens to a credit score when a consumer uses a HELOC to consolidate credit card debt? (Let's assume that they don't cancel the credit cards.) That depends on a variety of factors, too. Just opening the HELOC will ding the person's score a bit. If the new HELOC's balance is close to the loan's limit, that could also ding the score. On the other hand, paying off high balances on credit card accounts will usually help the person's score. And leaving the card accounts open may help the person's credit utilization rate, which is good for the score.
  • Should homeowners get a HELOC for more than they need so they don't "max out" the loan? It won't hurt the person's FICO score to have a higher loan limit. This strategy might be OK if the higher limit doesn't seduce the consumer into using more credit than he or she can comfortably repay -- a big if. Another obvious danger is that with HELOCs, the house itself is at risk if the loan payments can't be made.

To ask a question of Dr. Don, go to the " Ask the Experts " page, and select one of these topics: "financing a home," "saving & investing" or " money."


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