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SMART MOVES

Credit Card Debt Can Block Way to Buying Home

June 01, 1997|ELLEN JAMES MARTIN | SPECIAL TO THE TIMES

If you're a typical American, you see thousands of TV commercials and newspaper ads each year--most urging you to buy something.

But if you buy with plastic and make the minimum payments on a hefty credit card balance, chances are you'll end up paying two to three times the cost of the original item when interest charges are added on, said Marc Eisenson, a consumer finance expert.

Indeed, buying on credit and letting the balances mount could cost you the chance to move from a rental unit to a home of your own, said Gerri Detweiler, author of "The Ultimate Credit Handbook," a new paperback published by Penguin Books.

The need to write substantial monthly checks for credit card debt can hurt the potential home buyer in two ways:

* It can rob you of the chance to amass a down payment.

* It can consume such a large proportion of your monthly income that no lender will give you a mortgage.

"All over the nation, we're seeing more debt and increased bankruptcies," said Dottie Bagwell, an education manager for the Consumer Credit Counseling Service, a nonprofit enterprise aimed at helping Americans manage their debt.

Many consumers meander through their financial lives without a road map to help them arrive at such goals as homeownership, Bagwell said.

"You'd use a financial plan to help achieve success in business, so why not run your household the same way?" she asked.

Once you've set your goal, you'll find it easier to summon the willpower to avoid excessive spending and pay off your debts.

Here are four pointers on slaying the debt dragon to buy your first home:

No. 1--Visualize your housing dream to strengthen your motivation.

You may be a year or two away from moving into a home where your young children will finally have a yard big enough to kick around a soccer ball. But why not tape a photo of your dream house on the refrigerator?

Such a reminder could, for example, help you overcome the temptation to order a $15 pizza when you know the money would be better spent on your Visa bill.

Another way to visualize your goal is to begin a bit of casual shopping for a home--even before you're a serious contender to buy. Perhaps you want a brand-new house, and spending a Sunday afternoon looking at models could help strengthen your resolve to pay off your bills.

No. 2--Learn to play the interest-rate game in handling your debts.

If you need to go on a debt diet to reach your homeownership goal, one of your first steps should be to take an inventory of your current obligations, said Eisenson, author of "The Banker's Secret," published by Villard Press in 1991. (To obtain a copy, call [800] 255-0899.)

List all your regular debts in terms of the current monthly payments, the total sum due and the interest rate charged.

While it's crucial to make timely payments on all your consumer loans, it's usually wise to apply any surplus cash you have to the debts bearing the highest interest rate first, said Eisenson, who offers tips on debt reduction in his book.

Obviously, this is the fastest approach to reducing the finance charges you pay each month.

However, there's a new wrinkle in the debt-reduction game. These days an increasing number of lenders, including mortgage lenders, are evaluating applicants with "credit scoring." This is a system designed to predict credit risk using a variety of factors like how long you've worked for your current employer and how many credit accounts you have open.

One factor commonly used to come up with credit scores relates to how large a percentage of your full credit line has been used. Lenders will subtract points from your score if you're "maxed out" on one or more of your credit cards, said Detweiler, former director of Bankcard Holders of America.

That could make it imprudent for someone about to apply for a mortgage to transfer debt from a high-rate card to a lower-rate card if that would max out the second card, she cautioned.

No. 3--Reach out for budgeting help, even if you're not in a financial fix.

You don't have to be caught in a quagmire of debt to obtain free or low-cost budget assistance from a Consumer Credit Counseling Service office near your home. The service, overseen by the National Foundation for Consumer Credit, runs nearly 1,300 counseling offices throughout North America. Last year the service assisted 972,000 consumers--a 20% increase over the prior year.

The core work of consumer credit offices is to assist those who are troubled by serious debt problems, including delinquencies, and to help avert bankruptcies through debt-management programs that involve clients' creditors.

But what is less well known is that the organization also operates a program of budget counseling for those who simply need a bit of financial planning help to reduce debt and keep spending under control.

What's more, many Consumer Credit Counseling Service offices now offer homeownership counseling sessions tailored to meet the needs of those contemplating a housing purchase. To locate an office in your area, call (800) 388-2227.

No. 4--Create an "eventually" list to defer spending urges.

Perhaps you hanker for a diamond bracelet or a trip to New Zealand. But rank your financial goals in order of priority, and such items could fall to the bottom of your list, well below owning a place of your own.

Still, keeping the diamond bracelet or the New Zealand trip on your "eventually" list will keep alive the hope that one day you'll find the means to fulfill such yearnings, too, Eisenson said. And who knows? A year or two later, after you've bought your home, you may lose interest in the bracelet or the trip and move on to other goals.

"People's money priorities change a lot over time," Eisenson said.

* Distributed by Universal Press Syndicate.

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