Credit card utilization, aka “revolving utilization”, is one of the most predictive, and
therefore valuable, measurements in the FICO credit scoring system. In fact, it’s a major
component of FICO’s “Debt Usage” category of characteristics, which is worth 30% of
the points in your FICO score. The higher your utilization, the ratio of balances to credit
limits, the lower your scores will likely be.
But how do FICO scores treat HELOCs (Home Equity Lines of Credit)? If you look at a
HELOC on a credit report it looks very much like a credit card account. They’re both
revolving accounts. They both have credit limits. And, they’re both issued by many of
the same banking institutions. Is it possible that FICO counts HELOCs as credit cards
when calculating your revolving utilization percentage?
The answer to the question is no, FICO scores do not confuse HELOCs with credit card
accounts. Their scoring systems are smart enough to distinguish between the two types
of accounts and therefore exclude HELOCs from the utilization calculation. However, in
their older credit scoring systems it was possible, albeit unlikely, that a HELOC could be
misinterpreted as a credit card.
The reason this is an issue is counting a HELOC as a credit card account can cause major
score damage or major score improvement. Think about what would happen if your
$50,000 maxed out HELOC that you’re using as a second on your home was counted as
a credit card. Your utilization percentage would be very high, and your score could be
very low. Now, take that same HELOC with a $0 balance. Your utilization percentage
would be very low, and your score could be very high.
You don’t think that’s a plausible example? Well, think about how many consumers
have escaped PMI on their mortgage loans by taking out 80/10/10 or 80/15/5 loans.
Guess what the middle number is likely to represent…a maxed out HELOC.
Either way the measurement would be incorrect. And, since credit scoring models aregarbage in garbage out systems any score generated from incorrect or misinterpreted
data is not going to be a true reflection of a consumer’s credit risk. The consumer could
be denied credit, assessed higher rates, or approved for a loan at terms that, frankly, he
or she didn’t deserve.
“The Credit Guru”, Longtime FICO Insider & Credit Industry Authority President Of The Ulzheimer Group, LLC
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group, the Director of Credit Education at DisputeSuite.com, Credit Expert at CreditSesame.com and the credit blogger for Mint.com. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 150 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.