| Millions of credit card borrowers are about to face | | | | Expenses are described as a percentage of monthly |
| larger monthly payments, a change that represents | | | | income. If your household has a monthly income of |
| both good news and bad for consumers. | | | | $8,000 and monthly PITI is $2,240 then your "front" |
| Under new guidelines suggested by the federal | | | | ratio is 28 percent. If overall required expenses are |
| government, starting in January minimum monthly | | | | $2,880 then the "back" ratio is 36 percent. Overall, |
| payments for credit card debt will generally increase. | | | | lenders would say the ratios are "28/36." |
| Many mortgage lenders will no longer require | | | | As it happens, to qualify for given mortgage loan |
| payments equal to 2 percent of the debt, an amount | | | | programs you must meet certain front and back ratios. |
| that includes interest and fees. Instead most will now | | | | The ratios for loan programs vary, so if you do not |
| require a payment equal to 1 percent of the debt plus | | | | qualify for one program you may qualify for others. |
| fees, interest and charges. Altogether, the new | | | | For instance, there are different ratios for conventional |
| payment will be more than 2 percent of the | | | | loans (28/36), FHA financing (29/41) and VA loans |
| borrower''s outstanding debt in many cases. | | | | (effectively 41/41). Adjustable rate mortgages often |
| This is the good news. The higher monthly payments | | | | use 33/38 ratios while other loans have even more |
| will reduce overall interest costs and force people to | | | | liberal standards, some with a back ratio above 50. |
| borrow less with credit cards. | | | | Now go back to the new payment standards for |
| The bad news? It will reduce the ability of many | | | | credit cards. If your required monthly payment goes |
| consumers to obtain a mortgage. | | | | from $200 to $280, that''s good for reducing credit |
| According to the most recent Federal Reserve report, | | | | card debt -- but your monthly required payment has |
| we now have $799.1 billion dollars in outstanding credit | | | | increased. For instances, monthly expenses may go |
| card debt. That''s about $2,681.54 per person: For a | | | | from $2,880 to $2,960. No a big deal in terms of cash |
| household with four people, average credit card debt | | | | or in the cost of a household with a monthly income of |
| amounts to almost $10,750. | | | | $8,000, but now the "back" ratio is 37 percent. |
| Such debt would not be a problem if it were offset by | | | | Whoops. That higher credit card payment means |
| equally robust savings. Unfortunately, the Bureau of | | | | some borrowers will no longer qualify for certain |
| Economic Analysis says our saving percentage was | | | | mortgages. They monthly costs are above the |
| -.2 percent in both October and November. Instead of | | | | guidelines. |
| putting money away, in those two months alone we | | | | What to do? |
| spent $37.4 billion more than we earned. | | | | First, start with the realization that paying |
| Credit card financing is unsecured debt -- a form of | | | | non-deductible, high-cost credit card charges is not a |
| financing that''s especially risky for mortgage lenders. | | | | magical path to great wealth. To get the best possible |
| More risk means higher interest, and in the case of | | | | mortgage, and to simply save more money, reduce |
| credit cards interest rates between 18 and 28 percent | | | | credit card use. |
| are well known. | | | | * Look at your credit situation and get rid of credit |
| Let's imagine a household with $10,000 in credit card | | | | cards you don''t use and don't need. Keep one for |
| debt. Imagine also that the interest rate is a modest 18 | | | | emergencies. |
| percent and that a monthly repayment equal to 2 of | | | | * Speak with underwriters. Ask if it is possible to get |
| the outstanding balance is required. If you borrowed no | | | | an "exception" to the guidelines. |
| more this loan would take 7.8 years to repay and | | | | * Start saving. People save enormous sums of money |
| interest over time would amount to $8,622. Increase | | | | with such basic steps as putting aside all singles found |
| the required monthly payment to 4 percent, the same | | | | in their wallet at the end of the day or all coins in their |
| debt could be repaid in 2.7 years and interest would | | | | pockets. Eat-in more often, bring lunch to work, keep |
| amount to $2,628 -- a plump savings of almost $6,000. | | | | safe cars longer and cut back on fashion and frills. |
| The new repayment standards for credit cards will | | | | * If you have credit cards, always make full and timely |
| reduce credit card debt for millions -- but the higher | | | | payments and keep balances at zero. |
| minimum payments will also impact mortgage | | | | * Instead of credit cards, use debit cards -- with a debit |
| applications. | | | | card you're simply using money already in your |
| When mortgage lenders look at mortgage applications | | | | checking account. Using cash on hand instead of credit |
| they consider many financial issues. Of particular | | | | means you're likely to buy less. |
| interest is what borrowers spend each month, | | | | * Get over-draft protection (a line of credit) for your |
| spending divided into two general categories: Housing | | | | checking account or link savings to checking accounts. |
| expenses and consumer expenses. | | | | Both can help prevent over-drafts and excess fees. |
| Housing expenses are typically seen as mortgage | | | | So the next time you pull out that credit card think |
| interest and principal plus property taxes and insurance | | | | about your real goal -- a new sweater or a new |
| -- "PITI" in lender jargon. Consumer expenses include | | | | fireplace, a fancy dinner or a better kitchen, higher |
| PITI plus such things as required monthly payments for | | | | monthly payments or less. In no time it will be easy to |
| credit card bills, auto payments, student loan pay, etc. | | | | keep the plastic out of sight and out of mind. |