LOC – Reduce Balance to ZERO to Avoid Interest OR

[Nir]

Hi All,

My understanding is that a LOC with balance of around 40% of your limit does not affect your credit score negatively.
I heard it might actually improve your FICO score compared to having zero balance on your LOC(?)

HOWEVER, on the other hand I also heard leaving zero balance can trigger an account closure by the bank(!)

So...is it recommended to leave a balance of around 40% of the limit in order to avoid closure of the line of credit by the bank due to lack of use OR
does it make more sense to leave ZERO balance in order to avoid paying interest!?

{Assuming you expect to use the LOC from time to time in the future (say once a year) but currently have the funds to pay the balance}

Thoughts?

THANKS,
Neil

 

[RedlineBrett]

I have not heard of a lender closing an LOC with a zero balance. I have several with zero balances that I have had for years and no issues. If your bank mentions this mention your thoughts of walking across the street as you will find other lenders that will do dormant HELOCs for you. Having LOCs like this is very common for rainy-day emergencies in order to put your cash where it belongs - in a solid investment like real estate!

Definitely want the balances small to help with your credit and why pay interest if you don`t have to.

QUOTE (investmart @ Jun 26 2009, 09:29 PM) Hi All,

My understanding is that a LOC with balance of around 40% of your limit does not affect your credit score negatively.
I heard it might actually improve your FICO score compared to having zero balance on your LOC(?)

HOWEVER, on the other hand I also heard leaving zero balance can trigger an account closure by the bank(!)

So...is it recommended to leave a balance of around 40% of the limit in order to avoid closure of the line of credit by the bank due to lack of use OR
does it make more sense to leave ZERO balance in order to avoid paying interest!?

{Assuming you expect to use the LOC from time to time in the future (say once a year) but currently have the funds to pay the balance}

Thoughts?

THANKS,
Neil

 

[Thomas Beyer]

keep the balance @ 0 if you have the $s .. and once in a while write a check to show "it is active" .. for a few days .. then pay it back !

Yes, any bank MAY close a LOC at ANY time (even if there is a balance owing !!!) .. so having two might make sense ..

There is competition (i.e. theer are other banks with LOCs for you) last time I checked .. so don`t worry too much about it ..

 

[Nir]

Thanks Thomas and Brett for the advice!

I`ll keep it at zero balance then, while not in use, as you recommend. Also, will write a cheque from time to time as Thomas suggested to reduce probability of closure.

However, regarding having a few LOC`s: Brett, FYI I think for the purpose of applying for a mortgage, having one LOC is better than a few with higher limit, as banks see it as additional risk even if all at zero balance.

Regards,
Neil

 

[RedlineBrett]

QUOTE (investmart @ Jun 30 2009, 12:07 PM) Thanks Thomas and Brett for the advice!

I`ll keep it at zero balance then, while not in use, as you recommend. Also, will write a cheque from time to time as Thomas suggested to reduce probability of closure.

However, regarding having a few LOC`s: Brett, FYI I think for the purpose of applying for a mortgage, having one LOC is better than a few with higher limit, as banks see it as additional risk even if all at zero balance.

Regards,
Neil

The last property I bought they just wanted to know the current balance and the minimum payments on each LOC. I have seen instances where they looked at what your payments would be if the LOC was maxed and applied that to your ratios. Probably depends on the lender.

 

[Nir]

I guess you`re right Brett, it depends on the lender. just something to keep in mind. Cheers.