Home Equity Line Of Credit Reduced?
What Happens To Your Credit Score If You Lose Your HELOC?
Has your bank frozen your Home Equity Line Of Credit?
More and more banks are re-calculating the estimated value of your home because of the declining property values hitting our entire country. Let's face it.....they're scared.
If they determine that the current value of your home has dropped severely enough, one of the ways they can reduce their possible risk it to freeze your existing credit line, (if you have any portion that is un-used anyway) so you no longer have access to those funds.
Guess what...this just hit your credit score!!!
This can even affect people with excellent credit because now, that "high credit limit" has just been reduced, which can negatively affect your "balance-to-limit" ratio. Because this particular category carries 30% of your total credit score weight, the loss of that credit limit on your existing line of credit can cause your credit scores to drop; and in some cases, this drop may be huge.
On top of the hit to your credit scores, now you no longer have use of those "emergency funds" if you ever need them. This can create a financial hardship on you, in itself. Of course if you're already maxed out on your HELOC, there is nothing the bank can do and your scores are already reflecting the fact that your line is maxed out.
Unfortunately there is no way to know if your bank is going to pull the rug out from under your existing credit line, if they haven't done so already. You'll find out when you get a letter in the mail from your lender and by then, the deal has been done and your line has already been frozen.
What can I do if I still have funds available?
If you do have money available on your existing line of credit and you know you're going to need that money in the future, the only choice you have to be certain that the funds are still going to be available, is to draw out the remaining balance and place it in the highest interest bearing account that you can find. If you know you're not going to use it for a year or so, consider a CD (Certificate of Deposit). Shop around at your local banks or go on-line. Rates for CD's can vary greatly from institution to institution and a lot of them have specials going on all the time. If you don't want to lock it up for a long term, then shop around for a high paying money market account
The only drawback to this temporary solution is you will have to pay interest on the entire balance every month. Because Lines of Credit are all tied to Prime Rate, we'll all just keep our fingers crossed that the Fed will leave it alone so we can juggle our finances a bit longer during this crisis!
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