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Will Consumer Credit Card Debt Impact Mortgage Buying Power?

Will Consumer Credit Card Debt Impact Mortgage Buying Power?

Consumers with high credit card debt today could become borrowers with a distinct buying disadvantage tomorrow.

The total amount of credit card debt for American consumers is approaching $1 trillion. Wow, that is a big number! Since the pandemic has seemingly become endemic, there has been a surge in credit card debt in this country. During the pandemic, some consumers used stimulus checks to save or pay down bills, including credit card balances. In early 2021, credit card balances had dropped 17% from the pre-pandemic high, according to a report from

Currently, inflation is forcing the costs of everything from food to gas to rise, and repeated rate hikes from the Federal Reserve have increased credit card interest rates to 20% or more. As of November 2022, credit card interest rates climbed to an average of 20.4%, according to data from the Federal Reserve Bank of St. Louis.

Consumers’ Credit Card Balances Soared 7% in the United States

As a result, U.S. consumers’ credit card balances soared 7% in the last quarter of 2022. This brought cumulated credit card debt to a record high of $986 billion, according to a New York Federal Reserve report, with overall debt rising to $16.9T. And Morgan Stanley estimates that last year consumers spent roughly 30% of the $2.7 trillion savings that were built up during the pandemic.

“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” said Wilbert van der Klaauw, economic research adviser at the New York Fed.

“At the pace of spending we anticipate, savings are on track to dwindle rapidly,” Morgan Stanley’s economists wrote in a January 24 note.

The job market remains surprisingly resilient. The U.S. recently announced the addition of 517,000 jobs, bringing the unemployment rate to 3.4%, a 50-year low. Unfortunately, most economists still expect a recession or at least a pull-back in 2023. Therefore, consumers that have racked up credit card debt will need to take a look at their overall spending and household balance sheet.

Credit Card Debt = Too High to Qualify

When credit card debt remains high, this can eventually lead to lower credit scores from the three largest credit bureaus, Equifax, Experian, and TransUnion, for the consumers carrying that debt. If any of these consumers find themselves in a position to buy a home, that low credit score could cost them a bundle.

Many mortgage lenders require a credit score of at least 620 to be eligible for a home loan. If a consumer has a credit score that is lower than that, they may need to look at certain government-backed home loans, including FHA loans, USDA loans, and VA loans.

Each lender must determine what score a potential borrower needs to qualify for a loan. The difference of just a few points on the borrower’s credit score could impact the monthly payments considerably. For example, the difference between a 5.5% interest rate and a 6% rate on a $200,000 mortgage loan is $64 monthly. That comes out to as much as $23,000 over the course of a 30-year mortgage.

If spending exuberance continues, the road to homeownership might be rocky for today’s credit-strapped consumer.