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Minimum Payment and how it affects your mortgage payment

Everyone knows that good credit translates into the best interest rates on loans and financing. That’s why it’s smart to do what you can to increase your credit rating — to 730 or higher, if possible — before buying a new home. You’ll end up with lower monthly mortgage payments for the same house. A better credit score is the result of discipline and consistency, which often starts with how you pay off your credit cards.

In May 2009, President Obama signed into law the Credit CARD Act, making credit card statements more transparent. This Act helps you pay closer attention to your financial habits and how they can affect your credit score. Financial institutions must now reveal how much you would pay if you only made the minimum payment on your credit cards — a huge mistake if you are looking for the lowest mortgage payments on your next home.

What Does It All Mean?

It’s so very tempting to pay the minimum amount when your credit card bill arrives. Depending on your total balance, your minimum payment may be as low as $15 to $25. It’s especially attractive if you’re juggling a mortgage payment, medical bills or maybe even a loss of income. But don’t do it — the consequences will haunt you and keep you in debt.

Because of interest rates starting at 17 percent (and only going up from there), it will take forever to pay off your credit cards if you only make the minimum payment. You may actually see your balance increase each month even if you don’t make any more charges. If you wonder what will happen if you only make the minimum payment, check your credit card statement. It now spells out the length of time it will take you and the total amount you’ll end up paying if you never use the card again and just keep making minimum payments.

Minimum Payment and Your Credit Score

Technically, you are honoring your financial agreement by making minimum payments. And the credit card companies are happy when you do that because they’ll make lots more interest off you. But by paying the minimum, you’re not making much of a dent in the amount you owe.

This strategy also adversely affects your total credit score through something called the “credit utilization ratio,” which measures how much available credit you have and how much of that you’re using. If you continually carry a high balance, one that’s more than 30 percent of the amount available to you, your credit score will suffer. And that means the mortgage payment on a new home may be higher.

The remedy for this situation is to pay more than the minimum required by your credit cards. You’ll eventually make a substantial dent in your debt. Another tactic is to ask your credit card companies to raise your limit so that you’re using only 25 percent or so of your available credit. Even if you do this, though, make sure you continue paying more than the minimum. Walking the minimum payment line is a maze that looks like the line at a Disneyland ride: endless. Don’t get caught in it. For more information about managing your debt to improve your credit score, contact Zack at Prime Mortgage Lending of West Asheville.

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