Thaw out your frozen credit

With a home equity line, here's what you need to know:

• Lenders aren't sweating the details. Many are freezing or reducing credit lines for troubled areas, regardless of how much equity their borrowers still have. If your home has held its value or hasn't dropped much since you got the home equity credit line, and you can prove it, you may be able to get a credit freeze rescinded.

• Equity is king. Add your current mortgage balance to your credit limit on your home equity line. (The limit is what's important, not the balance you owe.) Divide that total by your home's current market value (check Realtor.com, Zillow or Cyberhomes for estimates, or talk to a local real-estate agent) to get your loan-to-value ratio. Lenders want your LTV to be 80% or better.

• Lenders have different standards. Some mortgage lenders don't want your primary home loan and home equity limit to add up to more than 60% of what your home is worth, particularly in fast-declining real-estate markets. Others may be willing to lend more. Some are pulling back in certain areas while others are expanding. In other words, if you can't get your lender to rescind a freeze, shop around.

• Get the right appraisal. Don't waste $300 or $400 on an assessment that your lender won't accept. Ask it for a list of approved appraisers.

• Monitor the danger. If your account hasn't been frozen or if a freeze was rescinded, you should remain alert. If home prices fall further or the bank's policies change, you could be cut off. Ask your home equity lender what its loan-to-value limit is on new home equity loans; if your home equity credit line plus your mortgage are over that limit, you're in danger of having your line frozen. (What matters is the limit on the credit line, not what you've actually borrowed against that.)

• Use it or lose it. You shouldn't borrow money you don't need, but if you're in danger of a freeze, you might withdraw any cash you'd been planning to spend in the near future. Gerhard, for example, withdrew $30,000 of his home equity to pay next year's tuition.

With a credit card freeze, here's what you should do:

• Know your current FICO scores. FICOs are the credit scores most lenders use, and the only place you can buy your FICOs for all three credit bureaus is at MyFico.com. One score costs about $16; all three are $48. If your scores are 700 or above, you should have some leverage with your issuer. The higher your score, generally the more they want to keep you. "Lenders want to hang on to the people with the highest credit quality," CreditCards.com's Woolsey said. "They're competing much more for those customers." (You can get a free estimate of your credit score by taking this 10-question quiz.)

• Point out your worth. If you have good credit and have been a good customer, you have options. Gather some of the credit card offers you get in the mail or take a look at the rates available in MSN Money's Credit Card Analyzer, so you know what rates and terms you'd be likely to get with a competitor. Then call your issuer and politely threaten to take your business elsewhere if it doesn't restore your old credit limit.

• Transfer your balance. As far as your credit scores are concerned, it's better to have small balances on several cards than one big balance that's pushing a card's limit. If your original credit card company won't restore your limit, transfer balances to other cards or use one or more of the competing offers. Pay close attention to all the fine print. You'll typically pay a 3% to 4% balance-transfer fee, so you want to get a low rate for as long as possible to make the transfer worthwhile.

• Don't close accounts. Closing accounts can never help your credit scores, and it may hurt them. Especially in this environment, it's important to keep accounts open and active (which also means dusting off an old card and using it once in a while, since issuers increasingly are shutting down unused accounts).

• Consider moving your debt to a fixed-rate installment loan. Credit unions and banks offer personal loans with interest rates that average around 13%. If you qualify, you can help your credit scores in two ways: by adding an installment loan to your credit mix, which is generally positive for your scores, and by reducing the balances on your credit cards.

If you don't have good credit, your options are more limited. You may not be able to get your issuer to change its mind, and it could be tough to open another account.

Your best bet is to pay down the balance as quickly as possible. If you're already having trouble paying your minimums, talk to a legitimate credit counselor -- one affiliated with the National Foundation for Credit Counseling. You can ask these credit experts a question on our Ask a Credit Counselor message board.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Dec. 18, 2008

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