loans vs. credit card debt, credit scores, first home dreams

Sometimes, people prefer loans in paying off their existing debts. This is not a very good move because you will be increasing your overall expenses if you fail to pay the loan amount. Instead of improving, it will affect your scores adversely. The debt burden is going to increase as well. Therefore, check your financial situation before you take the loan. Make sure that you will be able to pay the loan installments. If you are able to stick to your plan, then only it can be said that you have done the right thing by taking a debt consolidation loan for repairing your bad credit. Any future lender will be interested in seeing your accounts paid instead of delinquent. No matter, how you get them paid.

Thanks for your note, BKP. I wonder whether everyone else agrees with BKP that our current situation isn't obviously better than our earlier situation.

Previously, we had a fistful of maxed-out/over-the-limit credit cards; our payments varied from month to month (depending on whether we were over our limit); the interest rates were high in most cases (20-28% apr). Having taken a personal loan with our credit union, we have now paid off nearly all of that credit card debt (two cards with balances less than 25% of total available limit); the interest rate on the loan which enabled this is fixed (15%) and far less than what most of the cards had been. It's a four-year loan; payments are taken directly from my paycheck (because it's through the credit union where I work). We're looking forward to having all of that debt (upwards of $25K) behind us in 48 months.

In our eyes, this situation seems vastly superior to the previous situation in many respects: logistically (less chaos to manage), fiscally, etc. But BKP has misgivings. What do others think?

When looking to get a mortgage,there are factors to consider before even talking to a lender. What is your total debt to income ratio(total debt payments vs payroll)? What is your projected housing cost vs income ratio(Pita payment vs monthly income)? Pita stands for principal,interest,taxes,& insurance.Most mortgage lenders like to see no more that a 40% ratio on both the debt to income & housing cost ratio. When you apply they will pull a three bureau report and will take the middle of the three scores for automatic underwriting. If your scores are low,I suggest you talk to an independant broker about getting a Fha/Hud guaranteed loan.

Thanks for this info, Cajunbulldog.

Two quick questions ...

(1) What do you think of my original suggestion that loan debt is more respectable than credit card debt -- in the sense that it's fixed-rate, one payment (auto-deducted from payroll), fixed term (will be paid off in 48 months)?

(2) When you say "no more than a 40% ratio on both the debt to income & housing cost ratio," do you mean total (i.e., debt to income + housing cost ratio = less than 40% of income) or each (i.e., debt to income = less than 40% AND housing cost ratio = less than 40%)?

Thanks!

1. installment accounts are graded differently than revolving(credit card) accounts.I have credit cards I pay in full every month just to use their reporting to enhance my report.The absolute two critical things mortgage bankers are looking at is age of accounts and payment histories.

2.Debt to income- Monthly debt vs monthly income 40%
Housing cost 40% monthly income.
Specific info on home buying and mortgages can be found at www.hud.gov

Thanks!