Correct Strategy?

[Anonymous]

Hey Folks, This is by far the most useful forum I've found in quite some time. I've cleaned up all my baddies and now need to work on my utilization. My 3 FICO scores are all in the low 700s. I have $20K in credit card debt with a $60K total credit limit. I'm considering getting a home equity to pay off the credit cards. If I get a $40K home equity line, will my utilization move from 33% to 20%? If so, should I expect my FICO to go up?

[RobertEG]

FICO scoring depends upon whether it is a home equity loan or a home equity line of credit (HELOC).

Home equity loans are scored as installment loan, but HELOCS  up to around $40K are scored as revolving lines of credit.

Need to know precisely what it is first........

[Anonymous]

Thanks RobertEG.

It really doesn't matter to me which one I get.

But...it sounds like I should get the HELOC in order to increase my max line of credit. I assume my FICO will take a temporary hit for the new credit and then increase over time because of the lower utilization.

Am I correct?

[RobertEG]

Fulton, the anser is yes and no.  The HELOC will add instant revolving CL and instant debt at the same amount, so overall revolving %util is a wash.. 

Your real gain with a HELOC is that it is at a much lower interest rate than your CCs, so monthly interest on total debt will go down.  If you then make the same monthly payments that you were making before the HELOC, you will be paying more in principal and less in interest each month, thus givng you a gradual imiprovement in %util.  But it will not be instant.

On the other hand, if you were to secure an installment loan, such as a home equity loan, it will add installment, and not revolving, debt.  Installment %util is scored under FICO much lower than revolving %util.   If you then use the installment loan money to pay of CC debt, you will receive an instant improvement in revolving %util. 

A home equity loan might make more sense than a HELOC.

[Madison]

Forget worrying about your Fico score if it is in the 700's. Pay off your high interest credit cards with lower home equity loan. Then pay off your home equity loan as fast as you can.

[Anonymous]

I guess I got a little paranoid about my credit scores.

Three weeks ago I found this forum after a lender pointed out to me that my scores were 596, 585, 619. I hadn't checked my credit in a couple of years so I was REALLY shocked. I found this forum purely by accident when searching for my FICO credit scores and it has paid handsome dividends. I had absolutely NO idea about how the FICO credit "scheme" worked. I read tons of questions/answers on this forum and then went into attack mode.

1) DV on a 2 yr old medical collection and had it removed from the credit bureaus. Medical facility took responsibility because they sent the bill to the wrong insurance company.
2) PFD on a recent medical collection and had it removed.
3) Persistent GW calls to CC and successfully removed a recent 30dy late.
4) Challenged a 2 yr old 30dy late mortgage payment and had it removed.

I have had no need to apply for credit in the past couple of years so I literally fell asleep at the wheel.

In a 2.5 week period (started July 10) my scores all went up over 100 points to 715-719.

Now I'm working to get my util down to below 9% so I can get to the high 700 range or better.

Many thanks to ALL on this board who have either posted a question or a reply. They have all been invaluable.

[marty56]

IMHO I dont think there is ever a good reason to get a HELOC/401K loan to pay of unsecured debt.  If you do that you would first need to take a hard look at your spending habbits to make sure that you dont wind up in CC debt again.

[Anonymous]

Point well taken marty56. However, most of the CC debt were for home renovations so we're fine on an ongoing basis.

[Anonymous]

What interest rates are you paying on the CC's?  If they're 10% and up, it would be worth investigating a HEL or HELOC- if the HELOC is 50k and up, it shouldn't report as revolving.  Interest rates on both are pretty good at the moment, due to the Federal Reserve lowering rates earlier in the year.  With transferring all the CC balances to one of those, you could: reduce the amount of interest paid (make the same payments you're currently making, with more of it going toward principle to pay it off faster), take your util % to 0, and get a tax deduction.

If your CC's have a very low or 0% interest rate, it wouldn't be worth it.

-MsMS