Q. I want to refinance but I’ve been refused because of a high credit ratio. My credit score seems to be around 711. I have gotten offers for debt consolidation. What is the best way to get in a position to refinance? I have about $100,000 in equity.
A. When you say “high credit ratio,” we’re assuming you mean a high debt-to-credit ratio, which compares the amount you owe as a percentage of the total credit available to you.
“If that is the case, then I do not think debt consolidation will work since debt consolidation initially does not improve your debt-to-credit ratio and actually may make it worse,” said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton. “This is because after consolidation, if you no longer have access to credit for some of the debts you consolidated, the ratio will go even higher.”
Debt consolidation makes sense to lower your interest costs by consolidating high interest rate debt with lower interest rate credit availability, Hook said.
It is not clear from your question whether you are refinancing with the same bank as who holds your mortgage now.
If not, Hook said you should give that bank a try. Assuming you have a good payment history, your current bank may be willing to refinance your loan.
If it is your current lender who is giving you a hard time about refinancing, Hook says you should shop because 711 is a good credit score.
Either way, you should make an effort to lower this ratio.
“From a tactical standpoint, as with any ratio, there are two ways to improve it: decrease the numerator — the balance on your credit cards — or increase the denominator — the limit on your credit cards,” said Hugues Rivard, a certified financial planner with Financial Life Focus in Livingston.
He said you can increase your combined limit on your cards by calling your current card providers and asking them to raise your limits, or by adding an additional credit card.
“This might seem counter-intuitive, but if you can get one which you do not use, that would improve your ratio,” Rivard said.
If you are not paying your balances in full each month, and therefore paying interest on your credit card balance each month, Rivard said one way to decrease the balance — or to slow the increase in the balance — is to call the credit card companies and ask for a lower your interest rate.
“This might work, especially if you have held that particular card for a while,” he said. “Consider, however, that these represent short-term tricks, and what I would call `Band-Aid’ approaches.
The strategic way to improve your credit ratio, and the one that makes the most sense long-term, is to reduce the amount that you owe on your credit cards, Rivard said.
He recommends for the next six to nine months, you make a concerted effort to reduce your spending, or increase your card repayment, and therefore reduce the amount that you owe on your credit cards.
Then, you can consider refinancing, with a better credit ratio.
“Your credit score would presumably improve as well, because right now at 711, it is good, but not great,” he said, noting he doesn’t think debt consolidation is your best option. “Improve the fundamentals, the credit ratio will get better, and your long-term financial outlook will also improve.”
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