Dear Dr. Don,
I am trying to consolidate my credit card debt. Late last year, I was denied a home equity loan from two banks because of too much revolving credit (the same credit I wanted to pay off with the loan).
I was planning on applying for another loan. Should I close my cards and ask my credit card companies to convert my revolving credit to installment loans? Are banks more likely to loan money if I owe money on installment loans rather than revolving credit?
— Ron Restructures
When you get a credit score, the score lists factors that brought down your score. Regardless of how good your credit score is, some factors are listed. The mix of credit can be one of the factors.
Closing the accounts is the wrong move because the length of credit history on your accounts is important, too. Converting some or all of the credit card debt to installment debt isn’t the answer and you’ll find it extremely difficult to do.
Mortgage lenders go beyond the credit score to look at the front ratio and the back ratio of your finances. The front ratio considers the amount of housing expenses as a percentage of your gross income. The back ratio considers all fixed expenses as a percentage of your gross income.
So, it could have been your ratios or your credit score that knocked you out of the box from qualifying for the home equity loan. The Bankrate feature “What lenders look for” provides additional detail.
Applying for a loan shows up on your credit report as a credit inquiry. It’ll stay on your credit report for two years, but only influence your credit score for the first year.
If you were denied on two second mortgage loan applications late last year, you’ll improve your odds if you let those inquiries reach their first birthday before applying for another loan. While you’re waiting, start working on paying down those credit card balances.
You didn’t provide the particulars on what your house is worth, the outstanding balance on your first mortgage or how much credit card debt you have. However, restructuring your unsecured debts into secured mortgage debt isn’t always the answer.
Even though you typically save money on the interest rate, you’re betting the roof over your head that you can make the mortgage payments. That, and taking 15 to 30 years to pay off your past spending, can result in a higher total interest expense.
I’ve painted a pretty bleak picture here. Debt consolidation can work — you just have to be committed to living within your means. Using debt consolidation only to run up the balances on your cards again will put you in a very difficult position.
Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.”