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 Dear
Dr. Don,
I purchased a house three months ago and am completely renovating the property. Part of the financing for the renovation comes from my personal lines of credit and credit cards.
After I started drawing the funds from my credit
cards, my credit score went down from 749 to 660. My plan initially was to refinance
and consolidate all the loans after I was done with the construction. However,
now that my credit score has fallen, I am afraid that I won't be able to get the
best rate. Can you please advise me on how to maneuver out of this situation with
the best result?
Thanks a lot,
-- Arthur Advances  Dear
Arthur,
You're right, a credit score of 660 won't qualify you for
a lender's best rate. Credit card providers use sophisticated models, like a credit
scoring model, to evaluate how much risk they face in extending you credit. That's
true not only of applying for new credit, but also in what's going on in your
open accounts. Maxing out your credit cards, taking cash advances and making minimum
payments on maxed out cards all trigger concern on the part of the lender.
Since
your credit score is based on the information in your credit report, these balance
run ups are showing that something's changing about your use of debt. Credit cards
are unsecured debt, so increased balances means increased risk to the lender.
That increased risk is showing up in your credit score. With
the benefit of hindsight, a construction loan would have been a better choice
for financing. A construction-to-permanent loan would have been even better. I'm
going to assume that you haven't missed any payments along the way. If that's
the case, your credit score problem stems primarily from a high credit used to
credit available ratio, and in the types of credit used. You need to bring down
the credit card balances to bring up your score. I'd like
to suggest a construction loan because it would only be in place until the project
is completed. The problem is that a construction loan isn't really designed to
pay down credit card debt; it's designed to pay against a contractor's project
draws. Still, it's worth the time to talk to a lender about
getting a construction loan. Just don't apply for the loan unless it's clear you
can use the proceeds to pay down the existing project debts. A new or increased
home equity line of credit, or a loan against your 401(k) plan, if
available, may be other possibilities. If it doesn't look
like any of these ideas will work in your situation then you may be forced to
decide between selling the property or going through two financings, one at your
current credit rating and a second when your credit rating improves. | 
