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YOUR MORTGAGE

Cutting Credit Card Debt Is Key to Getting Loan

September 01, 1996|ELLEN JAMES MARTIN | SPECIAL TO THE TIMES

"Too heavy a debt load."

Those words can be among the most weighty in the English language for those denied the chance to buy a home.

You may have adequate cash for a down payment.

You may have a decent record for paying your bills on time.

But if you're carrying large consumer debt balances--and lack the income to support them--most mortgage lenders will stamp the word "reject" on your loan application.

"If you want to buy a house, you may have to carve your debt load," said Jon Sheldon, a staff attorney for the National Consumer Law Center, a Boston-based nonprofit group focused on consumer education.

Access to credit cards is easier than ever, and debt loads are mounting, said Robert B. McKinley, president of RAM Research, which tracks the credit card industry for both consumers and banks.

"We're plasticizing more and more of our payments, and consumers are now really loaded up with debt," McKinley said.

The average American household now carries $3,970 in bank card debt, up 25% from last year, he noted. And that figure doesn't even count department store cards, gas company cards, installment debts or car loans.

Why do so many bear debts that jeopardize their dreams of owning a home? Temptation is one explanation, said Gerri Detweiler, author of "The Ultimate Credit Handbook," a 1993 Plume book due for release in revised form next spring.

Every day, tens of thousands of Americans are mailed unsolicited offers for pre-approved credit cards. Competition among card companies is fierce. And low introductory teaser rates make the card offers all the more appealing.

Through sophisticated computer programs, card issuers can closely track their cardholders. Miss a payment or two on one of your cards, run up your balances or step over a credit limit and you'll suddenly find yourself hoisted into a much higher interest rate, maybe even more than 20%.

Granted, the country's high rate of credit card delinquencies means more risk for card issuers. But some credit card experts, including McKinley, think the hope of higher profits--rather than risk protection--is the prime motivation for the upward interest rate adjustments many cardholders now face.

"We now have punitive rates that are justified by risk-based scoring," says McKinley, of RAM Research.

Are you a would-be home buyer who needs to carve debt? These tips could help:

1. Take an active role in your credit card management.

In nearly all cases, it's perfectly legal for your card issuer to impose unexpectedly higher charges on their cardholders. Somewhere buried in the fine print of the notices your card company sent you were warnings that your rates and fees could rise.

But the reality is that most customers never read the fine print, said Detweiler, former executive director of the Bankcard Holders of America, a nonprofit membership group that helps consumers solve their credit problems.

"Most people don't cuddle up in front of a fireplace to read their cardholder agreement," she said.

Passivity is the reason many Americans are paying too much on their credit cards, said Marc Eisenson, author of "The Banker's Secret Credit Card Software," first released in 1991, which shows consumers how to cut their interest rate charges. (The software can be obtained by calling Good Advice Press at [800] 255-0899.)

Eisenson urges those paying high interest rates on their credit card debt to simply phone their card issuers and request a cut in rates of at least 2%.

They may have to be persistent and speak to several levels of supervisors, but eventually more than 50% of cardholders who ask for rate reductions prevail, Eisenson said. Why? Because card issuers are loathe to lose customers, especially those who are profitable to the companies because they carry substantial amounts of debt and have good repayment habits.

2. Try to shift your debt to lower-rate cards.

Some Americans, who are very alert to credit card costs, frequently move their debt from higher-rate cards to lower-rate cards, taking temporary advantage of low introductory rates on pre-approved cards that come in the mail. That can dramatically reduce their interest rate costs, Eisenson said.

3. Set up a support system for your debt reduction program.

Just as dieters often do better when they join a group designed to encourage their goal, so debt-cutters can find moral support from outside sources.

One inexpensive way to obtain "budget counseling" is to contact the National Foundation for Consumer Credit referral line at (800) 388-2227. This hotline can put you in touch with a nearby consumer credit counseling service office or similar nonprofit agency offering free or low-cost financial counseling.

4. Put yourself on a "debt diet" that's focused on your housing goal.

Make your goal tangible and you increase your chances of meeting it, said Eisenson.

Why not tape a picture of the sort of home you want to buy on the front of your refrigerator? Then underneath it, tape a graph to chart reductions in your debt load.

"That's like hanging a size 8 dress next to the refrigerator to remind you how wonderful it's going to be to take the weight off," Eisenson said.

Distributed by Universal Press Syndicate.

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