Buying a house in 11 months...

[ButterflyJen]

How would you suggest reducing our debt at this point? We have student loans (that's good credit, right?), one car loan (also good credit, right?), three credit card bills (not so good credit - ugh), and some hospital bills from DD's birth.

I'm thinking pay off the hospital bills first, then start paying off the credit cards one by one. Start with the smallest balance and work our way up. I think we'll get two paid off completely this way - definitely won't get the third one (it's way up there at this point).

Buying in 11 months is a definite. We just sold our first home and are renting for a year. The rental is, well, tiny and gross. ;) Not our thing at all, and we really want to be homeowners again. We did okay the first time around, with the same types of debt (maybe a little less back then though).

TIA for any suggestions!

[med12]

Hi there.....

I am by no means an expert but there are a lot of different ways you can reduce your debt at this point. You have 11 months so that's a good amount of time to buckle down, pay off debt and save some money.

The first thing to do is stop using the credit cards and pay cash for everything. Not an easy thing to do but it can be done.

Then, list your debts in each of the following orders: highest to lowest balance, lowest to highest balance, highest to lowest payment, lowest to highest payment, highest to lowest interest rate and lowest to highest interest rate. Then, once you do that - figure out which way of listing will get you out of debt quicker if you paid the most you could pay on the first one and the minimums on everything else. Then, when the first one is paid off - you add that payment to the next one on the list, etc. This is called "snowballing" and if you do a search on snowballing, you should be able to find a good spreadsheet to help you run the numbers, including interest rates.

Any extra money you get during the next 11 months via bonuses, gifts, income increases goes to the first one on the list. But, I would also split that extra money in half and put half of it towards card 1 and half into savings. Buying a house, even with no money down, can be expensive - you may want to paint, do landscaping, buy curtains, etc. and you want to be able to pay cash for that.

Good luck and keep us posted on your progress!

[greenbunny]

One tip my realtor gave us is that when they run your credit for a home loan, there is no distinction between a credit card balance that you pay off every month, or one that you carry. Whether you pay the minimum amount and pay interest, or pay off the whole card every month, it looks the same on your credit report.

So, DH and I had just bought a living room set on our Discover card. The mortgage place didn't know we were going to pay it off right away, all they knew was that our card was almost maxed out. I ended up running over to Sears and paying the balance off in cash so our credit wouldn't look bad. I was furious because we've never paid a penny of interest in our lives, yet they still thought we were running up all the debt.

So the best thing you can do regarding this is (besides paying down your limit as much as you can) for about the last 3-4 months before you're going to apply for the loan, don't use your credit cards. They want your use-to-limit ratio to be very low.

Another issue is if you are involved in any "no payments for a year" type of programs. If you bought furniture or a car or something and they let you defer payment on it, that may come up on your credit as a late payment. It isn't fair, but it happens. A friend of mine bought a washer and dryer at Sears and got no payments or interest for a year. When she applied for a loan to buy a townhouse, they said she was negligent on the payment for the washer and dryer and she almost lost the loan. She ran around getting paperwork to prove that she didn't have to pay, but it was a big hassle and she ended up just paying off the Sears bill so she could get the home loan.

[Oakley]

Ditto with what greenbunny and med12 said- pay off those credit cards first! We're actually going through this right now (closing on our house in 3 months) and we're trying to eliminate as much debt/increase our credit scores in a very short amount of time! I've heard that it looks a lot better if your balance on your credit cards is at or below 49%- I'd aim for that first so that your credit score will jump up. Next I'd start with the highest interest. I agree with saving as much money as you can- don't forget about closing costs! :rolleyes: At the same time, I'd pay what you can on the hospital bills so they don't go to collections.

Good luck!!!

[houseblend]

I agree with the others - it's best to start paying off your credit cards first, both for the purpose that they have higher interest rates and to lower you balance/limit ratio.

My only concern is you mention medical bills. It is important you talk to these companies/hospitals to work out a plan. They can be pretty stringent about sending outstanding bills to collections fairly quickly. I'd hate to see you get a collections showing on your credit report right before you buy a house.

[ButterflyJen]

Thanks for the suggestions (and keep 'em coming!).

I should have noted that the hospital bills are not that bad. I think they total around $600, so definitely manageable. :)

[mir322]

The others made good suggestions as far as paying of the CC debt first. However, do make sure you are putting some money aside for savings. Unexpected expenses always pop up and you don't want to have to run up the CC bill again for them. Snowballing is a good method. If possible, see if there's a 0% balance transfer on your lowest interest card. Then transferring the balances from the other two cards may save you interest. It sounds like you have a plan! Good luck with the house :)

Miriam