If you’ve received a HELOC freeze notice, you have more to worry about than a lack of funds. A decrease in your credit limit may actually harm your credit score.

Here’s how:

If you have a lower limit (under $20,000 usually, but no one knows the exact figure), your HELOC is probably reported to the credit bureaus as a “revolving line of credit.” In this case, the bureaus treat your HELOC as though it were a credit card. If a lender reduces your credit limit, your total available credit will go down and your utilization will go up. f your utilization goes up too much, your score will suffer.

Consider this example: A borrower has a HELOC with a limit of $20,000 and other revolving credit (such as credit cards) with a limit of $30,000. If has $20,000 of debt, his utilization is at 40%. However, if he loses his HELOC line, his utilization skyrockets to over 66%. The high utilization may cause his credit score to lose points.

What to Do if Your Credit Score Suffers from the HELOC Freeze

If you notice a credit score drop after having your HELOC line reduced, don’t panic. Remember, the drop is due to ratios that can be improved. Paying back your debt will reduce your utilization and raise your score.

Another solution is to apply for additional credit, either through credit cards or by refinancing your HELOC with a different lender. While this option may help in the long run, it has risks. Your credit score will temporarily drop when you apply for and open a new line. Additionally, it can be tempting to use high-interest credit cards in place of a lower-interest HELOC.

If you don’t plan on using your credit score to make a large purchase (i.e. house, car, etc.) in the next six months, you may want to just hold out. Your regular monthly payments will chip away at your utilization and your score should make a steady recovery.

See Also:

Will a HELOC Affect My Credit Score

Will Paying of Credit Cards with a HELOC Improve My Credit Score?

Tags | credit score, FICO, FICO score, Heloc, heloc freeze