Monday, August 3, 2009

What should I do about credit card debt? Do I have to pay it off before I can save for a house?

I'm 26 years old, I make about 50k a year and I want to start thinking about buying a house. What should I do with this nagging credit card debt? Aside from car payments, the only other debt I have is $5,000 on one of my credit cards. Can I think about saving for a house, or should I pay it off before I even consider it? Thanks.

What should I do about credit card debt? Do I have to pay it off before I can save for a house?
You do not need to pay credit card debt off before saving for a house. In fact, you may not want to pay it off completely anyway. It doesn’t hurt your credit score (which will become important when applying for a mortgage) to have a couple of open lines of credit showing active use and on time payments.





The thing is, you don’t want to have more than 25%-30% of the approved credit in use.





On the other hand, if your credit card debt is at a high interest rate, it just might make sense to reduce it substantially before starting your savings.





The interest banks are paying on deposits is ridiculously low and, while savings are important, in fact critical for purchasing a home, it just does not make sense to pay high interest on credit card debt when you have the money in the bank that could pay it off. You’ll be losing money on a daily basis that way and it just doesn’t make good sense to do that.





If you feel you must start saving, I suggest that you try to save $1 for every $4 beyond the minimum you pay on your credit cards.





Hope this helps.
Reply:You could definitely try to qualify for a home loan before paying off the debt. Just keep in mind you have to pay off the debt someday...the longer it stays on your credit report, the more chance it has to affect you and your credit score.





The key to qualifying for a house is to make sure you can afford it. If you are having trouble balancing and keep racking up debt, you should definitely concentrate on eliminating the credit card debt for now. The ideal plan would be to set your own budget and plan a way to get it all done within the next year or so.
Reply:It will be easier for you to afford your mortgage if you don't have that debt hanging over your head. Remember, you are entering into an expensive stage in life, home ownership, and having debt nagging you during that stage will make it harder. Get that old "renter's debt" taken care of, then become a home owner. With prices still falling on homes, you may be very glad you did!


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