I've written before about using a home equity loan or line of credit (HELOC) to transfer debt away from credit cards.  Last month, I discovered another possibility for those with a 401k account at work.  Most 401k accounts let you take a loan against the funds, usually up to around 50% of the value in your account.  For me, there was also a $125 origination fee.  I have to say up front that experts I admire generally frown on this strategy.  There's a good discussion of this issue at Poorer Than You, and Liz Pulliam Weston over at MSN Money claims this is one of the 7 most common 401(k) blunders.  Here's what her article says:

About a month ago, I received an alert from my Equifax service that my FICO score had dropped 16 points... argh!!!  I logged in and found that my most recent credit application from early May had triggered an inquiry limit, and flagged me as a consumer desperately seeking credit.  Well, it is true that I have applied for credit more over the last 2 years than in any period of my life, but it has not been in desparation.  Over the last 2 years, I've purchased a home and a townhouse, both for rental purposes.  I opened several credit card accounts, including one each from Home Depot and Lowes, to help finance and improve the properties.  All these accounts had very attractive initial interest rates, so it made a lot of sense from a pure financial and accounting standpoint.  My initial seed money for the purchases came from a home equity line of credit (HELOC), and I've since refinanced the first home I purchased.  My two rentals are doing well and turning a small profit, and I have significant equity in both properties.  Yet the vagaries of the FICO formula conspired to make me look desparate.  As I've mentioned before, the FICO formulas don't know or care what your income is or what assets you own, they simply look at trends in your credit habits and try to predict the future based on large-scale patterns of those with similar credit habits.  Some will be helped by these calculations, while others will appear to be a greater credit risk than they really are.

Generally, if you carry balances on your credit cards, canceling one of the accounts will hurt your FICO score.  One key factor in the FICO calculation is the debt utilization ratio, which shows how much of your available credit you are actually using.  If the total of the limits on all your cards adds up to $20,000, and your balances add up to $10,000, you have a utilization of 50%.  That doesn't sound too bad, right?  Actually, that is relatively high in the eyes of the FICO calculation.  You should try to keep utilization low, below 30% if possible.  Zero percent utilization is best, of course, because creditors love most to loan money to people who appear not to really need it!

Gerri Willis, author and host of CNN's "Open House" wrote about the new FICO '08 formula for determining creditworthyness in this article. As you know, the FICO score determines creditworthiness in the eyes of almost every creditor. It determines whether you are approved for a loan, and what interest rate the creditor will extend you. Insurance companies vary rates according to your FICO, some employers and potential landlords also use the FICO to guide the price you get charged for their products or services.

According to Gerri, Fair Isaac, the company that develops the formula (Fair Isaac is the ‘F' and ‘I' in ‘FICO'), has created improvements, especially for consumers in the 600-700 score range, the so-called subprime borrower. Several improvements were announced. The new scoring model ignores credit issues concerning values less than $100 dollars. Presumably, paying late on a small "nuisance" debt has very little correlation with how you perform on more important loans like a mortgage, auto, or even a credit card debt.

This week I started shopping around for a mortgage to refinance my rental property.  I had originally purchased this property using a home equity line of credit (HELOC) on my primary home.   So the plan is to refinance the rental property and pay off the HELOC.   I had planned on waiting until working my FICO score back up above 700, thinking that would make a significant impact on loan terms. As of now, my FICO score as reported by Equifax is 696. With the recent drop in mortgage interest rates, I want to be sure to be ready, so I began shopping around. I checked a number of locations, including my local credit union, my insurance company (USAA, which also has a banking, credit card, and mortgage business), and the company I've used for my last two home refinances, www.internetmortgage.com, which is actually Bank of Blue Valley (BBV) out of Overland, Kansas. My credit union (Ent Federal Credit Union) had the best application process I've seen.  If you're like me, you get frustrated typing account information, knowing the bank pulls all that information from the credit reporting agencies anyway.  Well, Ent pulls the information right into the application, after confirming that its OK to check credit.  Very refreshing.

My credit card debt crept up slowly over the years, and hovered around $20,000 for quite a while. It seemed that just when I'd get serious about paying it down, another expense would pop up... a major car repair, soccer and hockey registration for the kids, Christmas. My interest rates seemed reasonable, and I got comfortable with the monthly payments as my salary crept up over the years as well. Paying off debt never became a huge priority.

Last year, after months of enticing from "Flip That House", I decided to invest in real estate. My strategy was to "fix and rent", with an eye towards building income for eventual retirement. I bought a bank-owned property in November 2007 with a new home equity line of credit, topped off with some more credit card debt. The plan was to rehab the house using more credit card debt, then refinance using the much higher value of the house as collateral. The result was a ballooning of my credit card debt to just over $60,000.