How a TV warranty can cost you $50,000 in home ownership costs.

 

The title of this article is meant to be attention grabbing, but it is true.  How is that possible you ask?  In order to answer that question, we need to have a small discussion about credit scores and their relation to mortgage rates.

As you undoubtedly constantly read and hear, your FICO score is one of the most important, if not the most important, financial factor in your life.  It can dictate whether you can afford to buy a Kia or a BMW.  It can dictate your limits on your credit card, or whether you can afford to take out loans for college or graduate school.  One of the determining factors of this score is the amount of debt you are carrying; proportionate to the amount you have available.  The higher that ratio, the worse of your score is.  The percentage to go by is 33%.   In other words, if you have a credit card with a limit of $10,000 and you’re carrying a balance of  $3,000, your credit score isn’t affected negatively per se.  But carry a $7,000 balance (much more than 33% of the available limit) with the same card and your credit score can dip significantly.

Now let’s say you’ve picked the home you want to purchase and you are shopping around with lenders because you need a mortgage of $500,000 for this home.  About two months before you apply for your mortgage, you decide to buy a nice big screen TV to go in your future home.  You use your credit card with a $10,000 balance to pay for the TV.  The TV salesman convinces you that you should insure your brand new equipment with a $300 warranty.  You agree.  The total cost of this purchase is $2000 but you also have some other purchases on this card totaling approximately $1500.  Guess what?  The card balance is now $3500 and counting.  The balance, in proportion to your credit limit, is reported to the credit bureaus and your FICO score drops approximately 15 points from a 740 to a 725.  The mortgage lender sees that and issues you a mortgage with a higher interest rate based on a FICO score of 725.  The interest bump causes your monthly mortgage payment to go up.  Over 30 years it’s not an exaggeration to assume you pay up to $50,000 more in mortgage payments based on that bump in interest.

So what’s the point here?  The point isn’t to avoid buying a warranty for your TV.  The point is to keep your spending to a low amount commensurate with your credit limit before you apply for mortgages.  Pay DOWN those debts to get your FICO score up.  Don’t ever overspend, especially around the time you apply to receive what will likely be the largest loan of your life.   Take care of your credit score because it will take care of you to the tune of thousands of dollars of interest.  Just my two cents.

Daniel Gershburg Esq. is a Bankruptcy & Real Estate attorney serving  clients in Brooklyn, Queens, Manhattan, Staten Island, Long Island and Westchester.  Mr. Gershburg has given lectures and presentations to both attorneys and the community at large surrounding Bankruptcy and financial advocacy in the New York City area. He is a proud member of the National Association of Consumer Advocates.  Chapter 7 Bankruptcy NYC

 

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