Will using up your entire home equity credit line count negatively on your credit report and score even if you are never late on your payments?
Making all your payments on time is the most important factor in credit scores, but late payments aren't the only thing that lenders look for when evaluating risk. Credit scoring algorithms not only consider whether your account payments are current or late, but they also weigh all of the details of your credit history and how those details interrelate.
A home equity line of credit (HELOC) is different from a home equity loan because a line of credit is a revolving account with a credit limit that indicates how much you can charge against it. Using all your available credit on just one account is an indicator of credit risk—even if all your accounts are still being paid on time. You can have poor credit scores without ever making a late payment because your overall credit use demonstrates high lending risk.
Is My HELOC Included in My Utilization Ratio?
Your utilization ratio is the second most important factor in FICO® Scores☉ . According to FICO, however, their calculations are designed to exclude home equity lines of credit when calculating credit utilization. Be aware that other score models used by lenders may include it, though.
Even if the scoring model being used by your lender or service provider excludes your home equity line of credit, it's important to understand how utilization rate is calculated, especially if you have one or more credit card accounts on your credit report.
How Is Credit Utilization Calculated?
Credit utilization is calculated by taking the total of all your revolving account limits, typically credit cards, and dividing that number by the total of all your revolving account or credit card account balances. The lower your credit utilization ratio, the better effect it has on your scores. Utilization above 30% tends to result in greater negative impact on scores because higher balances represent significantly increased risk of default. Because of this, if you've stretched your credit use to the limit, your credit scores are likely to suffer—even if you've never missed a payment.
Using all of your available credit on any account, including a home equity line of credit, can have a negative impact on some credit scores. The more "maxed out" accounts you have, the more serious the impact on your credit scores. Once you've used all your available credit, you no longer have room to take care of any unexpected financial issues that may arise. If your car breaks down, your child gets sick or there's some other unforeseen expense, you won't be well-positioned to handle the costs.
How Can I Tell What's Hurting My Scores?
The easiest way to understand what is currently impacting your credit scores the most is to pay close attention to the risk factors you received with your score.
If you haven't already done so, you can request a free FICO score directly from Experian. It will come with a list of the factors that are affecting you the most at the time your score was calculated.
Addressing those factors will help you improve all your scores. For example, if your risk factors state that your balances are too high on revolving accounts, you'll know that paying down your credit card balances could help increase your scores.
Thanks for asking.
Jennifer White, Consumer Education Specialist