Entries Tagged 'debt' ↓

Credit Cards and Mortgages
Big-picture statistics relating to the real estate industry are notoriously hard to pin down. However, according to several sources of mortgage-related statistics, about one-sixth of all homes in the U.S. are currently worth less than their mortgages. This is about 12 million homes. Broad-brush estimates of mortgage delinquencies suggest that as many as one in eleven homes in the U.S. is currently either in default or in foreclosure.

The Intersection of Credit Card Highway and Mortgage Lane
The real estate market is under water, unemployment is rising, and many homeowners are under pressure to find a way to make a mortgage payment. Debt management under these conditions can force consumers to take a hard look at whatever options might be available. One of those options is using a credit card to make a mortgage payment.

Should I Pay My Mortgage With My Credit Card?
This is a tough question, and the answer is usually “no.” It is generally not a good idea to use a credit card to make a home payment. However before addressing the “no” part of this issue, let’s look at the “yes” part.

The Rare “Yes” Case
Let’s assume that you happen to have enough money in your bank account to cover your mortgage payment. Let’s assume that your business travel schedule has kept you on the road unexpectedly for a few days longer than expected. Your mortgage payment is due, and circumstances force you to make the payment with your credit card. This exception to the rule makes sense for two reasons: 1) it is unavoidable, and 2) you have the funds required to cover the payment. One other point needs to be made here: you should only do this with a credit card that does not charge you interest on a carried balance and you should pay it off immediately with the funds in your bank account.

The More Common “No” Case
Mortgage payments are normally large. They represent a significant portion of the normal monthly household budget. They consist of principle and interest payments. Early on in the life of a mortgage loan, most of the payment is interest. If you pay your mortgage with a credit card, you will basically be charged interest to pay interest. This is a poor business practice.

Credit-Card Interest Is About 2.4 Times Mortgage Interest
For the sake of argument, let’s say credit-card APRs run about 15% on average (this is actually a reasonable approximation of the current average). Let’s also say that the average 15-year fixed-rate mortgage is about 6.25% (also a reasonable guess). If you pay your mortgage with your credit card at these rates and are unable to pay off the credit card immediately, you are effectively paying about 2.4 times more interest that if you had not used a credit card.

The End Result Is Financial Disaster
This leverage is unsustainable for any extended period of time and is almost certain to end with both foreclosure of the home and revocation of the credit card. These events will hammer your credit score and scar your credit report, making it difficult (if not impossible) to get credit in the future.

The bottom line? Keep mortgage debt and credit-card debt separate.

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Debt is a fact of life. Well-managed debt makes life easier. Poorly managed debt can create serious and lasting problems. Because of the potentially high Annual Percentage Rates (APRs) that credit cards can carry, credit-card debt is potentially much harder to manage than, for instance, mortgage debt.

My Debt Load Has Become Unmanageable – What Should I Do?
Effective debt management basically boils down to two key strategies:

• Debt consolidation, and
• Negotiated debt work-out

Debt Consolidation – The Concept
Debt consolidation involves taking out a loan or establishing a credit line and using funds from either source to (hopefully) pay off all outstanding debts. This is an attractive strategy for many consumers because it reduces the number of stressful telephone calls and letters they receive. It also replaces debt at several APR rates with a single rate.

Debt Consolidation – The Reality
The debt-consolidation industry is littered with predators and scam artists who make money – one way or the other – by convincing consumers that one payment is better than 8 or 10 payments. This debt “solution” frequently carries an APR roughly similar to that of a standard credit card, and it might involve unexpected fees as well. Hidden or misrepresented fees are another potential problem with respect to this debt-management strategy. Tread carefully here, and insist that all rates and fees are disclosed in writing before proceeding down this path.

Debt Work-out – The Concept
Credit card and mortgage companies basically want existing clients to retire their existing debts in a responsible manner. Debt work-out strategies essentially call for those who owe money to contact the firms to which they owe it and offer to work diligently at paying down the balance.

Debt Work-out – The Reality
Credit-card and mortgage companies are sometimes willing to negotiate payment schedules and possibly lower rates for consumers who show good-faith efforts to retire their debts. Not all companies do this, however. Credit counselors make a living handling these negotiations. Generally speaking, they simply offer what a debt-strapped consumer would offer: an effort to retire debt in return for concessions on APRs, due dates, or balances. Tread carefully here also. Make certain you understand the fee structure and who is paying the fees. Get everything in writing.

Is a Credit Card a Good Debt-Consolidation Tool?
The goal of debt consolidation for most consumers is to replace, say, 10 payments and 10 APRs with one payment and one APR. Using a credit card as a debt-management tool is usually not a good idea for the following reasons:

1. Credit-card APRs are commonly higher than APRs for other types of debt,
2. Credit-reporting agencies document activity of this nature, and (depending upon specifically what you do) it might adversely affect your credit score

Diligence and Communication are The Best Debt-Management Tools
Good-faith negotiation is generally the best way to deal with difficult debt situations. Take actions that do not increase your debt load or force you to pay fees or exorbitant APRs. Be cautious about offers of free assistance.

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