Numbers Count: Consumers take on more credit in October
Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.The numbers: Consumer credit increased at an annual rate of 5.5% in October, led by a 7.4% increase in non-revolving credit, which consists of auto loans and student loans. Revolving credit — mainly credit card debt — rose 0.2%, according to the Federal Reserve’s monthly report on consumer credit released Dec. 7. What counts: If you are increasing your outstanding debt (and during the holidays, who isn’t?), just remember added borrowing — for a car, holiday gifts, a ski vacation, etc. — may affect your borrowing power to purchase or refinance a home. Here are two things I tell people to keep in mind:
- Your credit score: Taking on debt can affect your credit score. The most important factor on your credit score is typically making timely payments on all outstanding credit accounts. So, first and foremost, pay your bills on time. But, your credit score also takes into account total available credit and what percentage of that total is being used. This means that even if you make the monthly payments, maxing out credit cards may lower your credit score. A higher credit score can help you qualify for a mortgage and also may help you qualify for a lower interest rate on a mortgage.
- Debt-to-income: Every mortgage borrower should understand at least one ratio: debt-to-income. Your debt-to-income (DTI) ratio looks at your total monthly debt payments — including credit cards, car payments, student loans, and property taxes if you own property — and compares that total to the money you take in each month — salary, government benefits, investment income, etc. Let’s say, for example, you have a car loan and a few credit cards with total monthly payments of $1,473 and you earn $4,420 a month (the median household income), your debt-to-income ratio is a manageable 33%. Generally, mortgage lenders want borrowers to hold their DTI below 43%. In fact, the federal Consumer Financial Protection Bureau (CFPB) says studies of mortgage loans suggest borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.
The bottom line? If you up your debt load with, for example, credit cards or by financing a new car, you are likely increasing your debt-to-income ratio and may be reducing the amount you can borrow for a new home or in a cash-out refinance of an existing home.
Data showing consumers taking on more credit is generally a sign of a healthy economy, which is good news. If you’re part of this trend, enjoy the good times. Just remember the future financial implications of the borrowing you do today.