Ask Money

A Home Equity Line of Credit

Chris Farrell Feb 14, 2008

Question: Hi – I have a $10,000 home equity line of credit (HELOC), which was essentially a 2nd mortgage when I bought my home 4 years ago. The balance of my HELOC is now $0; I do not plan to make any future HELOC withdrawals as I have a substantial “emergency” cash fund. (My primary mortgage balance is $190,000.)

Is there any reason to keep the HELOC open, such as for tax or credit score reasons? Or, am I better off officially closing the HELOC account? I may sell this home in 1-2 years. Thanks for your guidance. Stephanie

Answer: As far as I am concerned there are two good reasons for keeping a home equity line of credit open. The first is that it acts as an emergency store of funding. The second reason is to pay for renovation projects over time. In your case, neither reason applies. Another factor to check out: Some banks charge “inactivity” fees. You don’t want to pay for that.

That said, here’s why most people would advise you not to close it: Your credit score. When it comes to credit scores the longer you’ve been doing business with a lender–and making your payments on time–the more you’re rewarded with a high score. It’s a numerical calculation that bothers me for two reasons. First, I do worry about keeping unused accounts in an age of identity theft. And secondly, financial common sense says if you’re no longer tapping into a product, end the relationship. The only beneficiaries of this credit score formula are lenders who can always hope that by keeping the account open, you’ll eventually start using it again.

Here’s a way out of the conundrum. If you aren’t going to be taking out a new mortgage, a mortgage refinancing, a car loan or some other big ticket borrowing for a couple of years, go ahead and close the account. The dip in your credit score won’t matter, and with time by maintaining payments on other debts your credit score will climb back up. However, if there is a major transaction in your future, I’d keep the account open. In your case, I’d leave it alone for now since you may sell your home in a year or two.

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