Refinancing your mortgage is an effective way to rebuild your credit, particularly if you have recently declared bankruptcy or otherwise have bad credit. With more relaxed underwriting standards, you may be able to get a home equity loan through a sub prime lender, sometimes known as "damaged credit" specialists, as early as six months after your bankruptcy discharge.Mortgage lenders classify borrowers into the following credit categories based upon their credit scores. These categories may vary slightly among lenders. Sub prime lenders offer B, C, and D credit, which means they offer credit to high-risk borrowers. For taking on these high-risk loans, sub prime lenders charge somewhat higher interest rates and fees.

Credit Rating        Credit Score

 A+                         700 A                          670 A-                         640 B                          620 C                          580 D                          550 E                          520

Credit card provider Providian Financial estimated that consumers with an average score would reduce card finance charges by $76 annually if they raised their score by 30 points. Mortgage refinancing through sub prime debt consolidation loans alone can help raise your FICO credit scores by at least 30 points, especially if you are diligent about keeping up with the monthly payments. If you refinance now to combine a second mortgage (home equity loan or line of credit) into a new 1st mortgage loan while cashing out on equity to consolidate reaffirmed credit card debts and other loans you may have, you save a lot of money. With the new minimum monthly payments being implemented by credit card companies, the savings could be even greater if you refinance now.

Paying down debt and making regular, on-time monthly payments are the fastest ways to re-establish good credit. Fair Isaac & Co. states that paying down your credit card balances by just 34% could raise your scores by almost 20 point, and paying your bills on time for 6 months could raise your FICO scores almost another 20 points. So, after making your payments on time each month for about 2 years, your FICO credit score should be well above the sub prime rateanything over 620 is considered above sub prime. Then, you could refinance again for a much lower interest rate.

Now is the time to take action and start rebuilding your credit. You can still refinance for a rate much lower than what you pay in credit card and other loan interest rates. And, you may be able to claim up to a 100% tax deduction on the interest you pay.