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How Credit Card Debt Will Prevent People From Buying Homes

Written by Posted On Thursday, 24 August 2017 15:57

Credit card debt is deadly. Nowadays, a lot of the complaints are about the increasing expenses of tuition, health related costs, and mortgages. People often think of credit card debt as a thorn in the side in comparison to bigger loans even when outstanding credit card debts can be just as harmful to your financial life.

Debt is already stopping people from a lot of life milestones. In a recent study published in the Concordia Law Review, cohabitation among couples was noted to have risen 138% in the past two decades since 1990 as a result of skyrocketing student loan debts. Now, you’ve probably noted that student loan debt is not credit card debt, but the effects of credit card debt are even worse. Logically, it makes sense that this phenomenon of crushing credit card debt will extend to other things such as buying homes, raising children, and retirement.

The Key Differentiator for Credit Card Debts

Not all debts are created equally. This is what I’ll term the key differentiator that set apart credit card debts from other types of debt. For several reasons, credit card debts tend to have much higher interest rates and a much shorter period where the debt is expected to be paid back, making returning the money inherently difficult for the borrower.

Recently, one of my friends, a physician in training, mentioned that he bought a house through some loophole involving student debts. He had already gotten a full ride to medical school, but borrowed money intended for his education at an extremely low-interest rate to pay off his house. So, in this way, he was able to offset a huge amount of debt by simply prioritizing a strategy that took advantage of low-interest rates.

The takeaway here is that interest rates make a huge difference between how financial pressure and stress of debt exerts on an individual and their family. Credit card debt is deadly because there are no strict limits on the interest rates that a card issuer can create. Believe it or not, it is entirely legal for card issuers and financial institutions to charge exorbitant interest fees - with some as high as some 79.9% - as long as they make these conditions clear to borrowers.

What often happens with credit card debt is that the interest rates are so high that people easily end up falling behind if they miss one or a couple of payments. At that point, the interest will stack and you’ll be quickly on a negative spiral towards financial ruin especially if you’re not the type to keep a meticulous grasp of your finances. This headline by The Huffington Post about one missed check and a lifetime of credit card debts captures the situation perfectly.

If you’re living paycheck to paycheck like 40 to 50 percent of Americans, then mounting credit card debts can really be the straw that breaks the back of the camel for you. When you have your back against the wall for rent payments, food, utilities, and other essentials, then credit card debt has a very real chance of setting you back for a long time until you can painfully claw your way out of it. Investing into self-credit repair services may help you keep your head above the water.

Relating Credit Card Debt and Ability to Pay Mortgage

Financial institutions aren’t blind. When it comes to money, you can be sure that a financial institution or bank likely has a better grasp of your finances and your ability to pay back loans than you even do yourself. As proof, banks often consider your other debt history before determining what kind of mortgage plan to put you on.

That’s the first direct relationship: Your credit card debt may be used as a significant factor in determining how your mortgage is calculated by your bank. As MoneyUnder30 reports, most lenders will not approve you for a mortgage if your debt-to-income ratio is over 43 percent. Furthermore, don’t expect to get a good deal on a mortgage if your debt-to-income ratio is higher than average but doesn’t cross a particular limit.

What happens here is that people get a ton of very unfavorable mortgage deals due to their mounting debts and end up continuing to rent and repeating the cycle where they only pay off an infinitesimal amount of their principal on their credit card loans as they try to survive. The more high-interest debts that you take on, the less likely it is that you’ll be able to escape them, let alone add on the costs of a mortgage as well.

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David Wither

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