Help a Reader: HELOC

Here's an email I received from a reader:

I have a Home Equity Line of Credit with National City valued at $60,000. I currently have a balance of $0 on this account and haven't used it in over two years. Recently, I got a letter from National City offering me $200 to close this inactive account. Is this a good deal? Would closing the inactive account have a negative effect on my credit score (which was in the high 700s last I checked) that might offset the free $200?

What advice do you have for him?

Comments

[My Life ROI]

I am a registered user on http://www.creditkarma.com/ and it has a pretty neat tool called credit simulator that allows you to "test" what would happen to your credit score if you took certain actions.

The score they provide is within 5 points of my FICO score... so it is reliable for me.

I just decided to do a test and simulate my score if I closed my oldest credit card and my score would decrease 12 points. There is no way to do specifics (e.g. what happens if you close that specific account) but it can give you an idea of relative effects on your score of different actions!

[Strick]

Have to admit I'm very curious about this question, why would it matter what it does to the credit score?

If one needs available credit in the near future, they wouldn't get rid of a credit line, and if they don't need credit in the near future, what do they care what their credit score is?

[Amanda]

I'd take the money in a heartbeat.

Unless there is something coming up that he will need hiscredit score for (or your debt-to-available credit is already extremely high), then the ding will be temporary and meaningless.

[Jerome]

If you still want the HELOC I would go talk to a smaller local bank tell them what National City is offering and see if they will let you open a HELOC and then take the money from N.C. and run. I have a good relationship with my small local bank so it may not be as easy as I think it is.

[Jay M]

Can someone help me here? This is one of the amazing things about credit rating that I don't understand. From what I've read here in the previuos blog comments if you close a credit line you are not using and don't use any more YOUR CREDIT SCORE GOES DOWN. Wouldn't closing a credit line volunatraily make you less risky!!!! So shouldn't your credit score increase?

[Spencer]

It's not that you voluntarily closed the account. The powers that be look at how much credit you use compared to what you have. Say you owe $1,000 and have $10,000 total available ($1,000 used, $9,000 unused). You're using 10% of your credit. Then you close an account that has no balance and $2,000 available. You still owe $1,000 but you only have $8,000 total available ($1,000 used, $7,000 available) and your ratio has gone up to 12.5%. The credit score calculator sees your ratio going up, deems you more of a risk, and drops your score.

Credit scores, where logic takes a vacation and the laws of physics are meaningless!

[Alaina]

To Jay
One of the factors in computing credit score is the length of credit history, so if you would close an account that has been open for any length of time, it would shorten your credit history (at least on paper anyway) and may lower your score as a result.

The other factor that needs to be considered, as Amanda mentioned is your debt-to-credit limit ratio. For example if he happens to have $100,000 in total credit limits, with combined balances of $40,000 right now his ratio is considerably lower than it would be if he closed this account (making his credit limit $40,000 and his balances $40,000). This would make him seem more risky to a potential lender, because at this point it appears, at least on paper, that he cannot control his spending and won't have any available credit as "emergency funds." Thus potentially making it harder for him to pay back any future loans.

AS FOR THE INITIAL QUESTION:

From my understanding the closing costs on HELOC's are much higher than $200. So unless you originally recieved a special deal of no closing costs and are sure you could secure that same kind of deal in the future, in an emergency, I don't think it is a very good deal at all. I would just let the account sit for now if you think there is any chance you could need the money in the future. If you are interested in keeping the line of credit open though, I would make a couple of random transfers, from the line to checking and back, a year. This could even be done in the same day so that you are sure you don't pay interest. This will prevent the bank from charging you any inactive type fees, or just closing the account anyway.

Another thing to consider is when you took out the loan, if it was a while back, when interest rates were higher you might be ahead to take the $200 an refinance elsewhere, again depending on the closing costs.

[Alaina]

To Jay
One of the factors in computing credit score is the length of credit history, so if you would close an account that has been open for any length of time, it would shorten your credit history (at least on paper anyway) and may lower your score as a result.

The other factor that needs to be considered, as Amanda mentioned is your debt-to-credit limit ratio. For example if he happens to have $100,000 in total credit limits, with combined balances of $40,000 right now his ratio is considerably lower than it would be if he closed this account (making his credit limit $40,000 and his balances $40,000). This would make him seem more risky to a potential lender, because at this point it appears, at least on paper, that he cannot control his spending and won't have any available credit as "emergency funds." Thus potentially making it harder for him to pay back any future loans.

AS FOR THE INITIAL QUESTION:

From my understanding the closing costs on HELOC's are much higher than $200. So unless you originally recieved a special deal of no closing costs and are sure you could secure that same kind of deal in the future, in an emergency, I don't think it is a very good deal at all. I would just let the account sit for now if you think there is any chance you could need the money in the future. If you are interested in keeping the line of credit open though, I would make a couple of random transfers, from the line to checking and back, a year. This could even be done in the same day so that you are sure you don't pay interest. This will prevent the bank from charging you any inactive type fees, or just closing the account anyway.

Another thing to consider is when you took out the loan, if it was a while back, when interest rates were higher you might be ahead to take the $200 an refinance elsewhere, again depending on the closing costs.

[Kira]

Close it! If you're not planning on using it (shouldn't anyway), and you don't plan on needing your score in the near future, take the $200. If you are planning on applying for something in the near future, leave it there (for higer score), get what you need, and then close it. Less muss, less fuss.

Make what you can as simple as possible. The rest of the world is complicated enough!

[George]

Depends on why you have the LOC. IF you got it in case you lose your job or for a rainy day, the $200 won't do you much good. But if you are comfortable and don't think you are planning on using it, $200 is $200.

However, I recently refied my 1st mortgage and had to close my HELOC - which like yours was just there in case I needed it - had it at ING for no closing costs. I intended to reopen another one since it didn't cost me anything. However, when I went to do it, they did their own appraisal on my home which was much lower than my refi appraisal and much lower than any I had seen before which cut my previous HELOC of $50 k down to only $16k. - so now I don't have it for that rainy day when I might lose my job. - just something to consider in this crazy credit tight market.

[Jim]

If you don't need the HELOC then go ahead and close it. As suggested already you could shop for a replcement HELOC from some other bank to act as backup in case you might need it.

There may be a small short term impact to your credit rating. It won't drop your score that considerably and it won't last that long. If a short term minor hit to the credit score isn't a issue then don't worry.

Make sure there are no strings or hidden catches. Specifically make sure that you get $200 with no fees to pay etc.

Jim

[The Passive Dad]

I've been wondering the same thing. I've got friends that have received letters that the bank will be revoking the unused balance on HELOC with no mention of how it will impact credit scores.

[Rick]

DONT CLOSE IT!!
YOU LL THANK ME LATER!

[Education Works]

From someone who was IN the mortgage-and-banking industry plus has the kind of credit scores that another indicates, why not use the HELOC so it benefits the borrower? Why not use it to strategically pay off debts similar to a combination checking or savings account as an example? I have--and do utilize--a program that provides prompts us when, who, when, and how much to transfer from another debtor into a similar type of account AND pay the least amount of interest without jeopardizing the line of credit.

Also, the banking and financial industries make money through cash flow, and never in more than two decades of personal, practical experience have I even HEARD of a bank or financial institution suggesting one close an account unless that account was remaining dormant and, therefore, being more liability on the books than asset. The key thing to keep in mind is keeping secured debt (like homes and vehicles) separate from unsecured debt and only transferring a MANAGEABLE amount from the latter to the former. A licensed and practicing NATIONALLY certified consumer credit counselor shared that tidbit of information with me and others as simply a good rule of thumb to follow. Until then, I thought everyone knew to do that and didn't realize how many people didn't.

[deech]

i received the same letter in september from national city and i also had a 0 balance on a 44,000 heloc. i think it expired some time in october the offer. anyway i decided not to take the 200 dollars and keep the heloc open just in case. just so happens after the deadline in october i received another letter saying that my account was frozen and i cant use it unless i get an appraisal for my house, which they said they would do for me but i would pay the cost of the appraiser about 400 dollars. so i got screwed. take the money while u still can. i lost out.

[steve]

take the money and run. national city will probably go down in flames anyway, and then what happens? my local bank gave me a heloc at 3.25%. it goes according to prime rate. I can't really see it affecting your credit score. actually, when you have an open line of credit, the credit bureaus rate you as if you have a balance on it. it's possible it could even raise your score to close it.

[Matt]

Close it. They are just going to close it eventually anyway. Trust me, I work for a credit union. This is a way for us to get rid of inactive accounts that cost us money to service while making it seem like we have done you a favor. We will eventually close it anyway for a reason such as inactivity, or lower appraised value, or anything we can come up with.

[Fine-Tuned Finances]

As long as you don't need to make any major purchases in the next 6 months, close it. The harm to your credit score won't be that bad.

[thomas]

I'd ask for more or tell them to shove it. Clearly it is in their interest to close it, not yours.