Q: I am in the process of a mortgage loan modification and now I am seeing creditors drop my credit line. Can this be prevented?
No. A typical mortgage modification technically causes you to miss a payment or two while your bank overhauls your home loan. Some consumers expect this: they're modifying their mortgages because they were missing payments in the first place. However, it sounds like you weren't expecting other lenders to take action based on changes to your home loan status.
Missing payments can damage your credit score more than just about anything short of a bankruptcy. Not only will your FICO and "FAKO" scores drop by at least a few dozen points, lenders may change your existing terms and conditions once they see you've fallen behind on one or two minimum monthly payments.
Mortgage modifications were relatively rare until after last decade's financial crisis. Before then, most homeowners could count on refinancing their home loans with better terms and higher equity. Our credit reporting and credit scoring systems simply weren't built for an environment where so many borrowers face such harsh market conditions. Some credit reporting agencies have only recently adopted a system that flags a voluntary loan modification instead of a forced default.
If a falling credit line is the only negative impact you've seen, count yourself lucky. Other homeowners have reported getting dropped altogether by credit card lenders after completing a mortgage modification, even if the loan and the line of credit were with the same bank.
You can offset some of the damage by opening a secured credit card with a major lender, such as Capital One, Bank of America, or Wells Fargo. Many credit unions and regional banks can also help you establish a secured line of credit, if you prefer to work with a professional face-to-face.
Even though I'm not a fan of paying a bank to lend you your own money, a secured credit card can help you reset your credit utilization. Banks look at this percentage two ways. First, they measure how high your utilization has crept across your entire debt portfolio. If you've got five credit cards with a combined balance of $1,000 against a combined credit limit of $10,000, your 10 percent credit utilization falls into most lenders' acceptable zone.
However, if $1,000 of that debt sits on an account with just a $1,200 limit, you'll experience the banking industry's second measure of credit utilization. That 80 percent figure on just that account can knock plenty of points from your credit score. And falling credit limits due to that loan modification can push your credit utilization even higher.
A secured credit card, even with just a $200 or $300 deposit, can improve the number of "pays on time" lines on your report, while slightly reducing your credit utilization. Keep making all your minimum monthly payments on time, and you'll gradually see your credit score recover.
- I'm a 22-year-old female who makes about $1,000 a month. I have a credit union credit card with credit line of $500. I recently applied for a Lowe's credit card and was denied. I'm always on time with my credit card payments. What would be the reason?
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- How long does it take to establish credit when you have no credit?