Home Equity Line of Credit affecting Credit Score

Q. We bought a home in mid 2004 which is now worth $118,000 compared to $97,900 when we bought it. We financed through Countrywide and got a 7-1 ARM for 80% and a home equity line of credit (HELOC) to pay the other 15% and put 5% down. We have $18,000 in credit card debt, although we have not actively used credit cards for nearly two years.

We have perfect credit history, my wife and I, however this HELOC counts as revolving credit and has dropped my FICO to 630 from 690 when we bought the home. We would like to pay off our credit cards and or HELOC because then we would be on installment credit which would boost our FICOs back up. However, with a 630 even with a perfect payment history I don't see how we are going to get a decent rate from anyone.

I wonder if you have any thoughts. My wife and I make a combined income of about $80,000 per year, I am 31 and she is 25. She has a similar credit score but has some deferred student loans as she is getting her masters degree. Thanks.

A. You ask some great questions.

You didn't mention what rate your ARM, HELOC and credit cards are at. That can make a difference, but I imagine that it isn't worth refinancing your ARM.

And I agree that you will probably have a hard time finding a decent rate on a Home Equity Loan. I have been researching those because I am building out my basement and the rates aren't that encouraging. With your credit score you could be looking at rates of 7-8% or higher.

The other issue to keep in mind is that your credit card debt is unsecured. By transferring that debt to a home equity loan, you are then using your house as collateral. I wouldn't recommend this because it would also put you at close to 100% LTV. As interest rates go up, housing price increases will either moderate considerably and may even go down in some areas of the country.

I recommend using any income possible to work on paying down the credit cards. The FICO score won't really matter until you need further credit and in the meantime, paying down your existing debt will improve the score.

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