In recent months, many of the nation's largest lenders have begun to freeze their customers' home equity lines of credit. Defaults on these "second mortgages" are increasing, and since they are in a second lien position, often times lenders are unable to recoup all or some of the amount owed if and when a home is lost to foreclosure. In response to this, some lenders are sending out notices to their customers letting them know they are no longer able to draw against their equity lines of credit or the size of the equity line of credit is being reduced dramatically to help reduce the risk to the lender.
 
Going a step further, some banks are contacting customers who have open equity lines of credit with no balance and encouraging them to close them (to prevent them from drawing against them) while the bank is willing to waive the early termination fee. In their notices, they are often telling customers that they will report to the credit bureaus that the account has been paid as agreed which will lower the outstanding level of indebtedness reported on that individual. The wording is often misleading in that it hints you will see an improvement in your credit score by taking the lender up on their offer.
 
Do not be fooled! The banks are not making this offer to help you - they are doing it to reduce their risk. Home Equity Lines of Credit are treated much in the same way credit cards are by most FICO scoring models, and as a result, closing the account reduces the amount of credit available to you which increases the ratio of debt vs. credit which will ultimately harm your credit score.

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