Score drop from 714 to 595 Why?

[Anonymous]

I had a score of 714 1.5 years ago before I applied for a home equity loan. My score has now dropped to 595. I have a couple credit cards with higher balances (90% of credit limit) but also lowered a couple others to zero. I don't understand how/why obtaining a Home equity loan would decrease my score that much. I have no late payments or anything else that would negatively affect my balance. Thank you for any guidance you can offer.

[1comingback]

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Lupemari wrote:
I had a score of 714 1.5 years ago before I applied for a home equity loan. My score has now dropped to 595. I have a couple credit cards with higher balances (90% of credit limit) but also lowered a couple others to zero. I don't understand how/why obtaining a Home equity loan would decrease my score that much. I have no late payments or anything else that would negatively affect my balance. Thank you for any guidance you can offer.

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You need to lower the credit balances you have to 30% or less of your CL.  This will bring DTI down and add points to your score immediately. 

[Anonymous]

Thank you for your response. Do you think it would add that much in the way of points to bring my score back to where it was? I wonder if taking a home equity loan really hurt my score and it it won't go back up much higher until that amount comes down significantly, which will takes years?

[1comingback]

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@Anonymous wrote:
Thank you for your response. Do you think it would add that much in the way of points to bring my score back to where it was? I wonder if taking a home equity loan really hurt my score and it it won't go back up much higher until that amount comes down significantly, which will takes years?

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Well I can tell you that in Nov. of 08 I maxed out my CCs and my score went down significantly (remember payment history and the amount you owe make up 35% and 30% respectively of your score). I rectified that to 30% and below of my CLs and my scores went back up. I cant tell you an exact number because it depends on the individual but you will see a noticeable difference.

As for your loan, i believe that you must again remember your DTI.  The loan will probably bring your score down in the short run.  But it should improve it over time because you will have another well manicured TL.  Thats going to add to your payment history-35% of your score. 

There are some awesome tools available to you on this site that you should explore.  The mortgage forum, frequently asked threads, etc.  Im new to this site too but if you look around "thoroughly" Im sure you'll find what you need.  If  not there's always the board.

Good luck to ya!

[Anonymous]

Thanks so much for your time and good luck to you as well!!

[Junejer]

Hello Lupemari, and welcome to the forums. Please read Credit Scoring 101, if you haven't already.

For best scoring results, get your overall and individual util down to 1-9% of the CLs.

Also, DTI doesn't factor into scoring.

Is the home equity loan a closed-end loan (which amortizes over a certain period of time), or is it a HELOC, which is open-ended (revolving)? If revolving, and small enough and is carrying a significant balance, that would be the cause of the score drop, in addition to the cards that are at 90% util.

[haulingthescoreup]

As ByrdMan said.

Is this a home equity loan, with a specific amount borrowed and fixed payments every month, or is it a home equity line of credit (HELOC), with a CL (credit limit) and varying payments depending on how much you've pulled out of it?

If it's a home equity loan, it should show up as an installment account, and it shouldn't affect your score much at all. If it's a HELOC with a CL of $40K or more (might be lower, like $30K), it is ignored in figuring your utilization. If it's a HELOC with a lower CL, it's being treating as if it were a credit card, and you could well be getting hit hard for that.

Otherwise, I'd say your points loss is due to the high util on those CC's. Anything 85% or more is regarded as maxed out, and that's a score killer.

The best thing about the penalty for high util is that if you can scrounge up the money to pay off your cards, it's the fastest way of improving your scores. Just make sure to have at least one card with a very minimal (i.e., $10) balance.