Second Mortgages & Increasing Your Credit Score

I'm not going to discuss all of the benefits of taking out a Home Equity Line of Credit or another type of second mortgage to pay off revolving credit card debt. That decision depends on so many factors that the decision can only be made after some insight into the individual's specific situation. Some of the factors include: interest rates on credit cards, minimum payments on credit cards, income expectations, current credit scores, future spending plans, the reason for paying off the debt, among others, so it's obvious that I cannot go into all of that here.

What I do want to address is the issue of increasing one's credit score by taking out a second mortgage on their home, this can also be a cooperative or a condo. If you are going to take out a second mortgage and consolidate your credit card debt in one payment, I recommend it's a fixed rate second mortgage. One's credit score will go down if the percentage of the revolving debt owed is higher than 50% of the high balance. Note that I said the high balance, not the credit limit of the card. If you have a credit card in your wallet than has a limit of $10,000, but the most you've ever charged is $1000, then you need to stay below a $500 balance or your credit score may suffer.

Having said that, a borrower shouldn't take the effort to consolidate debt into a Home Equity Line of Credit only to have their credit drop as a result. Yep that's right, the borrower's credit score may go down. The reason for this is that the borrower right away has an enormous maxed out revolving credit line. The balance upon opening a Home Equity Line of Credit is as high as it's ever been, and unless you start paying down principal, that maxed out line of credit may bring your credit score lower instead of increasing it.

The alternative is to consolidate your debt by taking out a Fixed Rate Second Mortgage. This will appear on your credit report as a mortgage with a fixed balance and a fixed payment, your revolving debt will be $0, and your credit score will rise as a result.

Again, you must take a cold, hard look at your complete situation and your goals before consolidating debt. It takes discipline to make it work out favorably. But if you are trying to increase your credit score, take a look at a fixed rate second mortgage instead of the line of credit.