Can Reduction in a Home Equity Line of Credit Affect My Credit Score?

A home equity line of credit is a type of secured revolving credit that uses your home's equity -- the value of the home minus mortgage owed -- as collateral. In certain cases, your lender may decide to reduce your home equity line of credit because of a drop in your income, an increase in your debts or other factors inhibiting your ability to repay the loan.

Function

Credit scores, also known as a FICO scores, are based on a variety of factors, including amount of debt, payment history and length of credit history. According to My Fico, 30 percent of your score is based on amounts owed, including your proportion of debt to credit. Ideally, you should use only 30 percent of your available credit. A reduction in your home equity line of credit will raise that percentage and have a negative effect on your credit score.

Mitigation

Although a reduction in your home equity line of credit throws off your credit balance, you can take action to mitigate the effect it has on your score. Start by paying your bills on time. Payment history is the largest factor in your credit score, and maintaining a flawless payment record will help you maintain a solid FICO rating. Paying down your home equity line of credit balance will reduce your debt-to-credit ratio, raising your credit score.

Prevention/Solution

Your FICO score factors in all your lines of credit, including credit cards and overdraft protection credit lines. You can attempt to restore your debt-to-credit ratio by contacting your credit card companies and banks and asking for an increase in your existing credit lines. If your creditors grant your request, it will increase your amount of available credit and lower your debt-to-credit ratio. This will have a positive effect on your credit score.

Considerations

Your overall credit status will determine how much damage a drop in credit score will have on your financial life. For instance, if you already have a strong credit history, a slight drop in your score is unlikely to have much effect on things such as mortgage or credit card interest rates. However, if your score is teetering around 620, the lower limit of prime credit, any reduction in your score will reduce your chances of gaining access to credit.

Exceptions

Although a reduction in a home equity line of credit will typically lower a person's credit score, it may have a beneficial effect for light credit users. If you use little of your available home equity credit, a line of credit reduction will raise your debt-to-credit proportion closer to the optimal range of 30 percent. This will actually serve to raise your credit score, as it will improve the amounts-owed factor of your score.