Palos Verdes homes owners have heard stories or have actually experienced equity credit lines being reduced by financial institutions. A letter is usually sent to the homeowner explaining that market conditions have dictated this reduction. For example, a homeowner may have originally had a $60,000 home equity line and now it has been reduced to $35,000; the homeowner has currently used $30,000 of their original credit line. Most believe that their credit scores are unaffected and that is incorrect.
Let’s go a step further. Your credit card limit was also reduced from $20,000 to $10,000 and your balance this month (after the Black Friday sales) is $9,000. You have never been late or missed a payment but suddenly your FICO score has dropped from 750 to 675 which will make it more difficult to get a new mortgage should you want to refinance or purchase a home. What happened?
Your new “line limits” were reduced closer to your balances and you are nearer to being maxed out. According to Kenneth R. Harney in a recent LA Times article, “Credit scoring models typically penalize high utilization rates because they are statistically correlated with future delinquency problems.” “Not fair,” you say; and I agree with with you – so does the National Association of Realtors which, according to the LA Times article, has demanded that Fair Isaac Corp., creator of the FICO score that dominates the mortgage market, take immediate steps to lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of non delinquent customers.” With National Association of Realtors lobbying for change, hopefully help is on the way. Click here to view the LA Times article.
