When Brandon Hill, a 28-year-old marketing specialist based in Salt Lake City, went to buy a house, he got an unfortunate surprise. "I was under the requirement for an FHA loan at the time by about 15 or 20 points," Hill says. "We tried to get the mortgage under my wife's name, but the lender backed out. We needed to get my credit score fixed to buy a house."
Laden with $10,000 in credit card debt between Hill and his wife, Brandon doubled his credit card payments, but still had to enroll with a credit repair service in order to raise his score the 20 points necessary to land a loan. "It was a really long and rough process," says Hill. "[Before credit repair], we felt like our payments weren't going anywhere."
Future homebuyers may not have to go through the Hill's hassle. As of February 22, new provisions from the Credit Card Accountability, Responsibility, and Disclosure Act will go into effect, helping indebted consumers looking to land a mortgage pay off their debt and raise their credit score faster. Here's now the new laws will affect homebuyers.
Those looking to unload some debt before applying for a mortgage are about to get a much-needed helping hand, says Catherine Williams, vice president of financial literacy for Money Management International financial counseling firm in Houston.
"Credit cards that offer an introductory promotional rate have to make that rate last at least six months," explains Williams. "If someone is applying for a mortgage and needs to pay down debt, they'll be able to get a low- or no-interest card and spend the next six months paying off their balance. That could be substantial."
In addition to offering lengthier teaser rates on new cards, Williams adds that the Credit Card Act will also optimize payments for consumers with old balances. When consumers hold cards with multiple interest rates - for example, a five percent rate on the first $3,000 of debt, and 20 percent on anything higher - their monthly payments currently pay off the cheapest debt first, leaving the pricier debt to accrue. Under the new law, payments will eliminate the more expensive debt first, leaving consumers with lower balances, higher credit scores, and a better likelihood of landing sweet mortgage rates.
"It's just going to help everybody get rid of their debt faster," says Williams. "That's going to make their credit score go up."
"The major thing this act will do for mortgagees is help them be more aware of what their debt utilization ratio is and better understand how to lower it," says Curtis Arnold, CEO of the credit card information web site, Cardratings.com. "Now credit card companies are going to have to warn you about what happens if you keep making that minimum payment, and how long it's going to take you to pay off that card."
Arnold adds that to raise their credit score and qualify for the best mortgage rates, consumers need keep their debt to 10 percent or less of their credit limit.
While the new credit laws won't actually pay down your debt for you, they will help consumers keep track of how much they owe by forcing card companies to print the total amount of debt, how long it will take to pay the debt making only minimum payments and how high the payments will be if the consumers wants to pay off the debt with interest within three years on every credit card statement and to give card holders a full three weeks (21) to make their payments.
"As of late February, the only way they can increase your rates is if you're 60 days late on your payment," says Arnold. "That's going to help mortgage seekers financially plan a lot better."
While the card act may help those carrying credit balances destroy debt faster, it's going to block other consumers from getting credit at all, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Fairfax, Virginia. For those planning to purchase a home in the future, this could have severe ramifications.
"People younger than 21 are going to have a lot of trouble establishing credit early on in their careers because they won't be able to get a credit card without a cosigner," Jones explains. "Because card companies won't be able to tack on new fees or target risky consumers, they might offset those costs by lowering credit limits or raising interest rates. That's going to create a tough situation for consumers who may be trying to get a mortgage."
The good news, Jones adds, is that those looking to clean up their credit before applying for a mortgage will be able to plan their finances much better. According to the new law, if a credit issuer does change your interest rate or card terms, cardholders will be given the right to opt out. Those who do opt out of a rate increase will lose the ability to use that card in the future, but will be given 45 days to find a new card, pay off their balance, and cancel their account. Changes in rates and fees will also only affect new balances, so future homeowners needn't worry about their old debts doubling or tripling days before submitting their mortgage application.
"The ability to say 'no' to new charges is going to give consumers who are looking for the best mortgage rates more control over their debt and their credit score," says Arnold. "It's going to help level the playing field. That 'Wild West' mentality that's been out in the credit card world until now is going away. There's a new sheriff in town."
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