Debt consolidation/Home equity loan

[Anonymous]

Hi! I'm new to this forum and have been lurking for the past couple of weeks looking for some answers but I guess my situation is different, so I shall post here.  My boyfriend and I are looking to get a home equity loan on his condo to pay off our credit card debt.  It is fully paid and we are only seeking 50k off our condo worth 250k.  We have been pre-approved with a few lenders, but the stipulation is that we would have to close all our credit card accounts which is something I really don't want to do since we both have 8yrs of credit history.  We have no late payments, but we are barely getting by with making the minimum payments on the CC and the loan would help us from paying 1,100/mo to 500/mo on a 10yr 3.75%apr loan.  I know many will advise not to transfer revolving debt to a home, but this is really a last resort for us.  We are in our mid 20s and in the future we would eventually want to buy a bigger home together in the next 5yrs.  Will our scores jump because we will be going from 70%utilization to 0% or dip because of the closed accounts?  Would it be possible for us to contact the CC companies after they are paid off and closed to reopen them and keep the credit history? According to the lenders, my TU score is 710 and his 704.  Thank you all so much in advance.

[llecs]

Welcome to the forums!

The score change will vary and it depends on the reporting now. First, the easy part. If you open a new TL (the HELOC), you would likely see a small ding (20 +/- a few). This is a guess of course and any change is dependent on your overall credit. Most, if not all, damage will fade over the next year.

Usually HELOCs factor into utilization for some FICO models. In this case, I doubt the HELOC of $50k would be scored that way. It should report as a mortgage loan, or something like that. This is actually good because instead of your utilization being cut in half to 35% assuming you did have $50k in balances that made up the 70%, as an example, your utilization would go to 0%. You aren't reshuffling revolving debt. Depending on your overall credit, your overall utilization on your CCs, and your individual utilization on each card, you could potentially see big gains as the balances approach $0. If you are at 70%, I'd hazard a guess of 50-80 points gained.

Once the CCs report as closed, they will continue to factor into utilization so as long as it reports a balance. There will be some lingering interest charges, no doubt, in the following statement. Your scores will peak at this point. However, once they report $0 and closed, then you'd see a very significant score drop due to not having any revolving credit. The CCs will still factor into your length of history and AAoA for the next 10 years.

I think any gains due to improved utilization would be wiped out due to the closures. Overall, I'd predict a very small loss once the dust settles with that loss going away inside of a year. Now if any individual CC were over the limit, then my answer might be a little different. This is my guess. Just make sure you end your habit that led to this in the first place. You wouldn't want a maxed out HELOC AND maxed out CCs. There is something you have to change.

[themeggerz]

I personally would not refinance the cards to your home equity loan.  The length of your credit history is super important.

Have you attempted contacting the CC companies and asking them to lower the rate? State that you've been approved for a HE and want to transfer the credit cards, but they want you to close the cards. Since you want to continue the relationship with the card companies, ask if they can reduce the rate.  

As a side note, not all banks require you to close the credit cards.  Have you talked to a credit union to see if they will let you keep the cards open? My CU, when I consolidated, took the cards and asked me to submit proof that they were paid off and not being used for 6 months.   Or have you considered a new card to transfer balances to, so you arent closing the others)?

[GregB]

None of the CC Companies will let you reopen accounts. If you have an Amex, they might backdate a new account using the date of the original account. Sounds like closing CCs would be a poor option.

It sounds like you have dug yourself into a big hole. The bank probably wants to make sure you don't do that again and end up buried in CC debt AND owe on the Home Equity Loan. The bank won't care if there was some good reason that you accumulated the CC debt.

You might look for a loan from a different bank that won't require closing the CC. With no other loan on the condo, a private lender should be easy to find but those tend to charge around 10% interest.

You might take the CC with the highest balance and/or highest interest rate and work out a reduction in interest in exchange for closing that CC.

The one thing that is really important here is to not be late on a payment. Cut your expenses, get a second job, whatever but one late on your reports could start a series of negative actions by the lenders.

[MattieNumNums]

I would do the HELOC as a last effort. I have had nothing but good luck contacting companies, telling them my situation, and working with them. These companies are always made to look evil but bottom line is they want the money we owe them and they will do just about anything to get it; including working with you.

[Anonymous]

Thanks llecs!

We aren't getting a HELOC, but essentially a 1st mortgage since the place is paid off and we don't want to get into the mess of reshuffling revolving debt with a HELOC.  Our CC debt is from opening cards when we were 18 and charging them up during undergrad years.  We are not over the limit, no late payments and there are no baddies, so we've been good in that aspect.  We are working to be much more financially responsible and this forum has offered a wealth of info, so now we know the importance of keeping low utilization. 

[Anonymous]

themeggerz,

We're looking to do that next, but really we just want to lower our monthly expenses and I doubt that the CC companies will match or even beat the 3.75% apr.  The credit union wouldn't approve us because I have not been on the title of the house long enough.  We don't want to do balance transfers because the utilization will stay the same and then we will have to worry about more due dates.  In the past couple of days, we were able to negotiote with the lender to keep a couple of our cards, especially the oldest ones we have.  We were asked to close some to get our DTI ratio low enough to be approved for the loan.

[Anonymous]

Thanks GregB,

We don't have an Amex, but we were able to negotiate to keep some open.  We are definitely trying to dig ourselves out and not make the hole any bigger with the home loan and CC debt.  Believe me, we've learned a lot with CC spending and this is going to be a big change and relief for us to get the loan.  Our main problem is high utilization and the interest on our cards is barely allowing us to make a dent on the balances.  While we both would get 2nd jobs, we are also in grad school and we are so exhausted as it is.

[GregB]

DTI is not affected by closing an account. It is affected by the payment on that debt as shown on your CR. That payment is actually the minimum payment required by the lender. If the amount owed is zero, there is no payment required.

I have a feeling the lender is uncomfortable with your other available credit, making it possible to get buried in CC debt and still owe the mortgage. That is probably the motivation to have you close some accounts. I have friends that are private lenders and they would love to loan money on a house at 25% loan to value and then have to foreclose. Banks seem to look at the foreclosure as a loss.

I still remember what it was like to work full time and go to school even though I received my last degree 38 years ago.

Sounds like you are on the right track. Good Luck!

[Anonymous]

I have a home equity loan and although it shows as a mortgage on my Equifax CR, it is still revolving credit and goes against my utilization. My CC are at about 16% but my overall utilization is 86% because of the equity loan. Your scores will take a hard hit. I called Equifax to confirm this.