Other Household Debt
The debt you incur for your household – your mortgage, car loan(s), and loans to buy large-ticket items such as furniture – represents a significant financial decision that can impact your cash flow for many years. Many of these loans are secured, meaning that, if you do not make payments on the loan, the creditor can seize the asset and use the proceeds from the sale of the asset to pay back the debt. Because an asset secures the debt, the interest rate on this debt is often lower than credit card debt.
Understand your credit
Lenders use credit reports and FICO scores in addition to income and expense information when making the decision to loan you money.
Credit reports help companies determine your ability to take on additional debt by detailing the debt you currently have, the amount of the monthly payments you make, and whether you have had any issues making payments in the past.
- FICO scores are a numerical indication of your ability to take on additional debt and are used by creditors to evaluate whether to extend credit and determine the interest rate to charge you for the loan. FICO scores use a 300-850 point scale, with a higher score indicating better credit-worthiness. Unlike credit reports, you usually need to pay to get your FICO score.
How do you boost your FICO score?
Pay your bills on time.
Make sure there are no mistakes on your credit reports.
Keep old credit accounts open even if you are not using them regularly – creditors look at the debt-to-credit limit ratio and the average age of your accounts.
If you are looking for a mortgage or car loan, try to have these inquiries done within a few weeks of each other; they will count as one inquiry in your score calculation.
Financing a Car: Loans vs. Leases
You need a new car. Should you buy or lease? While the monthly costs for a lease are generally lower than those for a standard auto loan, there are other factors to consider. Let’s look at the pros and cons of loans and leases.
Financing a Home - Mortgage
For many people buying a home is the most critical financial decision they make. Financing that home often represents their largest monthly expense and a decades-long financial commitment. It’s important to understand the mortgage options available to you.
What’s in my mortgage payment?
Mortgage payments generally consist of:
- The principal payment* and interest on the outstanding loan balance
- Homeowners insurance – generally your annual cost divided by 12
- Real estate taxes – generally your annual cost divided by 12
- Mortgage insurance – if your down payment on your house is less than 20%, your lender may require you to pay mortgage insurance. Learn more at Consumerfinance.gov *Note: interest only mortgages do not require principal to be repaid during the interest only term, typically the first 5-7 years, of the mortgage.
What are closing costs?
There are many potential costs associated with buying a home in addition to the purchase price. These include title search fees, loan origination fee, legal fees, escrow for insurance and taxes, and other costs. These costs are paid at closing. If you are selling your house, you may also pay commission to the real estate broker. Learn more at consumerfinance.gov
Tips & Resources - Other Household Debt
This material is for informational purposes only and is not intended as investment, tax, financial, legal or other advice. Your personal decisions should be based on the recommendations of your own professional advisors.
Unless otherwise noted, websites referenced herein that are outside the www.cpg.org domain are not associated with The Church Pension Fund and its affiliates (collectively, the Church Pension Group) and the Church Pension Group is not responsible for the content of any such websites.