If we were all as good at saving money as we are at spending it, few of us would have mounting credit card debt and would have far more savings. Today, it's all too easy to walk into a store and see something we're sure would add value to our lives and simply pay for it with our credit cards. Today, you can start planning on saving more money towards your home down payment by creating a game plan to pay off your credit cards and save the money you would have paid for those monthly bills towards your home down payment.
Credit Card Interest Eats Away Your Savings
Unlike home interest payments, credit card interest payments are not tax deductible. The main thing you can do is to begin paying more of your credit card debt down and to use the savings from paying down that debt to put towards your down payment.
There's nothing wrong with using your credit card for purchases, however the best rule of thumb is that if an item is going to take you more than three months to pay off, then you'd probably be best waiting. Credit card interest rates are substantially higher than you may think, coupled with monthly charges for administering the card, you may find that the item you purchased on sale and used your credit card for ultimately costs you far more than purchasing the item at full price because of the interest rates.
How To Deal With Existing Credit Card Debt
One of the issues is many of us carry high balances on our credit cards. This creates an unusual burden for many of us and also impacts our savings plan, especially when we are saving for a down payment for a home. Since carrying high credit card balances also impacts our ability to get a home mortgage loan, it becomes even more sensible to pay off balances while we're saving for our home down payment.
Set Up A Plan
The most important thing you can do is to set up a plan to deal with your credit card debt while you still hold to your plan of saving for your home down payment. Sit down with all of your credit card statements and find out what your balances are and how much your monthly payments are at this time. Begin by paying double your minimum monthly payment which helps reduce the interest burden and also reduces your balance far more quickly. The biggest thing to remember is that once you have established a habit of paying this amount on a monthly basis, you're no longer depending on those funds for day to day living expenses and that means that once the credit card balances are paid off, you'll be able to take that payment amount and add it to your home down payment savings balance. In you planning, it can also really help to have a personal finance journal.
Making The Commitment To Be Debt Free And Own Your Own House
The first thing you need to do as part of your plan to pay off your credit cards is to make a commitment to not use them unless something of an absolute urgent nature arises. You don't necessarily need to cut up or return your credit cards, simply stop carrying them in your wallet or your purse so you're not so tempted to use them when you see something you'd like to purchase. Keeping your commitment to reduce your credit card debt shouldn't be difficult if you really are committed to saving money towards your home down payment. Keeping a positive money saving attitude is really helpful for motivation!
Look At Interest Rates
Make sure you look at the interest rates on all of your credit cards. You may be able to save additional money by transferring balances to a lower rate card that either you have or you may be able to obtain a card with a lower rate. Another sensible option is to begin paying off your higher interest rate cards first as they'll cost you more money over time. Doubling or even tripling your minimum monthly payments on your higher rate cards will allow you to reduce your debt even faster and allow you to save even more money towards your home down payment.
Nicety Vs. Necessity
It would be very nice to have that brand new pair of pants, set of dishes or exquisite set of glassware. However it may be necessary to have a new winter coat, groceries or a prescription. It's important when you are considering a purchase on your credit card to differentiate between an item that will be nice to have and one that is necessary. If you have a necessity that needs to be met and you're forced to use a credit card you may want to purchase it but pay it in the full amount as quickly as possible (preferably by the time your credit card statement is in) while a nicety could certainly wait until after you've reached your home down payment savings goal.
Credit Cards And Mortgage Applications
It's really important that you understand that when you fill out your mortgage application that you are going to have to claim all of your credit cards whether they have a balance or not. A debt to income ratio will be considered in the approval of your home mortgage application, and you need to understand how they impact you. Typically a lender likes to see your income and your expenses all laid out - even though your credit cards have a zero balance they will still be considered an expense! I bet you're wondering how a zero balance works against you! Well what will happen is a home mortgage lender will take your overall available credit and they'll estimate the monthly payments and take that into consideration when calculating your debt to income ratio on your home mortgage application.
Once you've paid off your credit cards carefully evaluate how much you have in "available" credit and pare it down to a manageable level. Those cards that you decide you can live without should be cut up and returned with a letter to the credit card company requesting that your account be closed. Remember not using the card doesn't mean that the credit card company will close your account, you must notify them in writing.
As an additional resource, I recommend How Much Answers section about credit cards. They offer a variety of useful introductory articles about credit cards, credit scores, and maximizing your personal financial decisions.
This article is written by guest author Doreen Martel exclusively for Save For House.