The holidays are here in Chicago, and it’s natural to get swept up in the splendor and spirit of the season. Watching the budget almost seems Scrooge-ish! And so we spend more on gifts than we might have intended, and let ourselves have all those little extras.
But if you’re planning to buy a Chicago home in the upcoming months, you need to defend yourself against holiday debt! Here are the common credit card traps you’ll want to avoid, and how they affect your home buying ability!
The zero-percent financing offer. This tempting holiday plum is offered by certain chain stores. But the “free” financing has a serious catch! If you do not pay off the entire balance of the item within a certain time, usually 6 to 18 months, you get socked with all of the interest that invisibly kept accruing during the temporary grace period. Then, you get to pay interest on the interest! And because your minimum required payments were never structured to be high enough to pay the item off during that introduction period, it’s a major trap.
The cash-back bonus offer. Some credit cards promise cash rebates based on a percentage of your total spending, usually between 1% and 5%. The offers may be good for limited periods of time. They might only apply to purchases made at certain stores, or apply to specific merchandise. They keep changing the reward structures, so you may not remember exactly how it works, where it will be honored, and when it expires. When in doubt, you use that card for everything. This makes it easy to over-spend, and harder to pay off your balance in full every month! You’ll pay much more in interest than the rewards you collect.
The store discount for credit application offer. A department store or big-box store might offer a 10% discount when you apply for their card at the check-out. Usually, you’re approved! Then you put your purchase on the new account because it’s just easier. The trap: these store cards come with endless, year-around mailers with sales pitches and limited-time discounts. So instead of doing price comparisons for an item you want or need, you head right to that store because you get a “discount” or other rebate for being a cardholder. This traps you into paying more for some products, even with the discount – plus you pay interest on the card balance.
How all these things affect your home buying ability: When you apply for any type of credit, your score temporarily drops by as much as 10 points. Opening two or more new accounts within a short period of time can lower your score for about a year.
The biggest impacts come from the outstanding debt that you carry. The more debt you carry on a credit card, the lower your credit score will be! And the more debt you have overall, the higher your debt-to-income ratio will be. Your debt-to-income ratio determines how much of a mortgage payment you can handle – and how much house you can afford to buy!
Piling up holiday debt is a one-two punch to your home buying plans! Don’t let impulsive credit decisions derail your home ownership goals. Exercising some financial caution now, will keep your future merry and bright!
StartingPoint Realty – expert help for first-time Chicago home buyers!
StartingPoint Realty provides complete education and guidance to first-time home buyers throughout Chicago and the Northwest suburbs! Attend our free home buying seminar to learn about the home buying process. There’s never any sales pressure or obligation! Always feel welcome to contact us for help with your Chicago home buying questions.
We wish you a wonderful holiday season!
Ryan Gable Broker/CEO Starting Point Realty
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