Using a HELOC; impact on Credit Score ? Bummer

6 Replies

We use MINT.com, which is nice.

According to MINT, what is largely dragging our credit score down (it's a 758) is credit utilization.

That's a few credit cards here and there but predominantly our HELOC is 60% utilized and bringing up our total credit utilization up over 40%.

I'm under the understanding that many people use HELOCs as a great way to pull out equity from their primary residence.

I don't understand why one would be penalized from having a stronger equity position in their primary residence?

Take for instance if we own a $200k house, and are maxed LTV and fully financed with a 1st mortgage, balance of $160k as compared to say having a first mortgage balance of $60k and another $80k balance in a HELOC.

Seems the 2nd scenario is worse for our credit (because of revolving debt) than the 1st - which confuses me.

Anyone have anything to share on this?

Originally posted by @Jim Goebel :

I don't understand why one would be penalized from having a stronger equity position in their primary residence?

A HELOC is a debt position (and they count the entire available amount against you) that weakens your equity position on your primary. Your equity position is definitely not stronger.

I haven't cared about or seen my credit score since 2012. I have allowed all of my credit cards to lapse and close after 2 years of inactivity (except 1 I've had since '91).  I cash-out refi'd a rental last year and was nervous that my credit score would be low.  The algorithm makes no sense to me.  My CC availability dropped drastically from over $100k to $15k, yet my score was above 800 on all 3. Go figure.

I think my score was high because of my current mortgage amounts vs original balances & borrowability.  I'm an old dog that has been paying on my til deaths for a long time, a lot of them paid off altogether.  That goes to credit utilization.  It's when we least need the money that we are most able to borrow.  Go figure.

That's what's getting you here most likely- 100% utilization of your primary. A tenancy to max out. My coin on this, Jim. Thanks for pointing out another HELOC pitfall. The other big one is fine print that allows them to freeze or call the line at anytime with a little bit of notice.

@Steve Vaughan

Steve I think you're misunderstanding something.  Thanks for the comment though.

What I'm getting at is that comparing two scenarios....

#1 I'm at a $200k property value with a $160k balance

#2 I'm at a $200k property value with a $60k balance on 1st note and $80k balance on HELOC. Total $140k debt

Scenario #2 is better from an equity position compared to scenario #1.

Why would this hurt our credit, is my point?

Thanks for the other comments by the way...  I am confused though why/how your credit score has not impacted your ability to borrow since 2012?  I mean, our credit score is deemed excellent so maybe there's a point of diminishing returns but I definitely have seen an uptick in our offered terms (%) on financing in the last couple loans.

Originally posted by @Jim Goebel :

@Steve Vaughan

Steve I think you're misunderstanding something.  Thanks for the comment though.

What I'm getting at is that comparing two scenarios....

#1 I'm at a $200k property value with a $160k balance

#2 I'm at a $200k property value with a $60k balance on 1st note and $80k balance on HELOC. Total $140k debt

Scenario #2 is better from an equity position compared to scenario #1.

Why would this hurt our credit, is my point?

Thanks for the other comments by the way...  I am confused though why/how your credit score has not impacted your ability to borrow since 2012?  I mean, our credit score is deemed excellent so maybe there's a point of diminishing returns but I definitely have seen an uptick in our offered terms (%) on financing in the last couple loans.

Oh, I did mis-read your stronger equity position. If you have more equity in #2, it must be the HELOC. The algorithm knows it can be freezed or called or terms changed without defaulting, unlike a mortgage. That's my best guess. Must fall under 'revolving' vs 'installment'.

I was just saying that I haven't borrowed from a bank since 2012 until last year so I was anxious about what my score would be, having closed $85k in available revolving credit.  I was surprised it went up.  Another argument for revolving heloc credit being the culprit of a score hit, even though your equity position is stronger.  

My lender couldn't have cared less about assets for my fannie loan, which I thought was weird. Not even liquid cash of 6 figures. Still made me pay off another mortgage to lend me less than I had liquid. The payment on that apt loan was $1700, so my DTI was high with no w-2. The balance was $64k, equity over $500k but didn't matter... Once I paid off that little loan, my new one went through fine. Assets just didn't matter much above the minimum required.

Originally posted by @Steve Vaughan :
Originally posted by @Jim Goebel:

@Steve Vaughan

Steve I think you're misunderstanding something.  Thanks for the comment though.

What I'm getting at is that comparing two scenarios....

#1 I'm at a $200k property value with a $160k balance

#2 I'm at a $200k property value with a $60k balance on 1st note and $80k balance on HELOC. Total $140k debt

Scenario #2 is better from an equity position compared to scenario #1.

Why would this hurt our credit, is my point?

Thanks for the other comments by the way...  I am confused though why/how your credit score has not impacted your ability to borrow since 2012?  I mean, our credit score is deemed excellent so maybe there's a point of diminishing returns but I definitely have seen an uptick in our offered terms (%) on financing in the last couple loans.

Oh, I did mis-read your stronger equity position. If you have more equity in #2, it must be the HELOC. The algorithm knows it can be freezed or called or terms changed without defaulting, unlike a mortgage. That's my best guess. Must fall under 'revolving' vs 'installment'.

I was just saying that I haven't borrowed from a bank since 2012 until last year so I was anxious about what my score would be, having closed $85k in available revolving credit.  I was surprised it went up.  Another argument for revolving heloc credit being the culprit of a score hit, even though your equity position is stronger.  

My lender couldn't have cared less about assets for my fannie loan, which I thought was weird. Not even liquid cash of 6 figures. Still made me pay off another mortgage to lend me less than I had liquid. The payment on that apt loan was $1700, so my DTI was high with no w-2. The balance was $64k, equity over $500k but didn't matter... Once I paid off that little loan, my new one went through fine. Assets just didn't matter much above the minimum required.

Yep I'm learning that assets and liquid cash don't matter much in terms of Fannie/Freddie as we speak!

Best way to offset this is to pay any credit cards before the statement cuts so they report zero balance and try to raise the limits thus lowering your overall credit utilization. It’s just how the credit score game works.

HELOCs are revolving debt, like a credit card, and count differently because you can very easily change your debt situation with them as opposed to an installment loan, like your mortgage. Your equity situation might be better right now, but you could change that tomorrow.

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