Should I use a HELOC or 2nd mortgage to improve my FICO score?
March 15, 2007 11:11 AM Subscribe
HELOC or 2nd mortgage (fixed interest) to consolidate credit card debt in order to improve FICO score?
My objective is to pay off high interest credit cards. I am a homeowner so I am trying to figure out if I should do a HELOC or a 2nd fixed interest mortgage.
I have heard that the HELOC is seen as one huge credit card and doesn't really boost your FICO score as much as a 2nd fixed interest mortgage. Is this true?
I have also heard recommendations of using a credit card consolidator, but then I can't use the interest as a deduction.
Any words of advice would be greatly appreciated.
My objective is to pay off high interest credit cards. I am a homeowner so I am trying to figure out if I should do a HELOC or a 2nd fixed interest mortgage.
I have heard that the HELOC is seen as one huge credit card and doesn't really boost your FICO score as much as a 2nd fixed interest mortgage. Is this true?
I have also heard recommendations of using a credit card consolidator, but then I can't use the interest as a deduction.
Any words of advice would be greatly appreciated.
Why are you in such a yank to improve your FICO score? Are you buying a new house or something? If so then adding debt onto your old one doesn't seem like a great idea, unless you've got a ton of equity and you're going to pay it all off anyway after you close the new place or something.
The problem with either of your plans (HELOC or 2nd mortgage) is that it turns unsecured credit card debt into a lien on your house. So, if you should run into troubles down the road, instead of telling them to go to hell, you could lose your house.
Why don't you just pay off the card with the lowest balance, do some balance transfers, and then start ping-ponging the balance between cards as you pay it down? Balance transfers are running 5-6% right now; even if each one is only good for 12 or 18 months or something, it's fairly straightforward to get another. Plus if your intent is to pay them down, you shouldn't even need to bounce that many times.
posted by rkent at 12:15 PM on March 15, 2007
The problem with either of your plans (HELOC or 2nd mortgage) is that it turns unsecured credit card debt into a lien on your house. So, if you should run into troubles down the road, instead of telling them to go to hell, you could lose your house.
Why don't you just pay off the card with the lowest balance, do some balance transfers, and then start ping-ponging the balance between cards as you pay it down? Balance transfers are running 5-6% right now; even if each one is only good for 12 or 18 months or something, it's fairly straightforward to get another. Plus if your intent is to pay them down, you shouldn't even need to bounce that many times.
posted by rkent at 12:15 PM on March 15, 2007
Yes, you're probably right about HELOCs being treated as a huge credit card. My FICO score was dinged by my HELOC. The credit agencies referred to this ding as "revolving credit."
So I'd go with the 2nd mortgage over the HELOC -- or possibly do a refinance, if you have enough equity, to carry a single, large 1st.
posted by Gordion Knott at 12:33 PM on March 15, 2007
So I'd go with the 2nd mortgage over the HELOC -- or possibly do a refinance, if you have enough equity, to carry a single, large 1st.
posted by Gordion Knott at 12:33 PM on March 15, 2007
seconding everything rkent said.
the big danger with paying off unsecured debt with a 2nd mortgage is that your spending habits don't change - you no longer have those big balances to remind you to go easy, so the temptation is to run up the same level of debt again...
by paying off the credit cards directly, rather than through consolidation, you're practicing financial discipline.
though by all means, look into balance transfers to get out from under punitive credit card interest rates - just keep in mind that balance transfers usually charge a percentage of the amount transfered.
posted by yggdrasil at 10:56 AM on March 16, 2007
the big danger with paying off unsecured debt with a 2nd mortgage is that your spending habits don't change - you no longer have those big balances to remind you to go easy, so the temptation is to run up the same level of debt again...
by paying off the credit cards directly, rather than through consolidation, you're practicing financial discipline.
though by all means, look into balance transfers to get out from under punitive credit card interest rates - just keep in mind that balance transfers usually charge a percentage of the amount transfered.
posted by yggdrasil at 10:56 AM on March 16, 2007
You need to ask this at Fatwallet.
I'm not as smart as they all are, but my recollection is that the major influence on your score that you can mess with is % utilization(the big determinants such as average age of accounts and past payment history aren't things you can change). If you get the balance on all your cards to below 50%, your credit score will improve. I don't know if the improvement will be blunted because you're doing this via HELOC, but generally $X of debt in a HELOC isn't as bad as $X of unsecured card debt.
It's definitely a smart move to lower the interest rate on your debt, but only if you have the willpower to not start accumulating debt on the cards again. You'll get lots of people telling you it's a bad idea, pretty much because of this danger, so be real careful about that.
posted by Mr. Gunn at 1:42 PM on March 16, 2007 [1 favorite]
I'm not as smart as they all are, but my recollection is that the major influence on your score that you can mess with is % utilization(the big determinants such as average age of accounts and past payment history aren't things you can change). If you get the balance on all your cards to below 50%, your credit score will improve. I don't know if the improvement will be blunted because you're doing this via HELOC, but generally $X of debt in a HELOC isn't as bad as $X of unsecured card debt.
It's definitely a smart move to lower the interest rate on your debt, but only if you have the willpower to not start accumulating debt on the cards again. You'll get lots of people telling you it's a bad idea, pretty much because of this danger, so be real careful about that.
posted by Mr. Gunn at 1:42 PM on March 16, 2007 [1 favorite]
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posted by ferociouskitty at 12:05 PM on March 15, 2007