Money Management

Getting mortgage approval could be tricky when you’re loaded with debt. Read on to learn more. 

There are different factors that mortgage lenders take into account when deciding whether to approve or deny a home loan application. One such factor is your credit score. The higher it is, the more likely you are to get approved for a mortgage. But a lower credit score could send the message that you’re someone who struggles to pay bills on time, and that could hurt your chances of getting to borrow for a home.

Another factor that mortgage lenders look at is your existing level of debt relative to your income, otherwise known as your debt-to-income ratio. It may be that you have a fair amount of debt at the time you’re applying for a mortgage. But if your income is high enough, that pile of debt may not be a problem.

It’s all about this ratio

You might assume that if you’re applying for a mortgage at a time when you also owe $15,000 on your credit cards and $20,000 on your car, then your chances of getting approved are going to be slim. But actually, whether $35,000 worth of debt stops you from getting a mortgage will depend on your income, plus other factors like your credit score.

Rocket Mortgage says that a debt-to-income ratio below 36% means you’re likely to get approved for a home loan. So even if you are juggling multiple debts, if those monthly payments take up less than 36% of your income, you’re in good shape.

Rocket also says that a debt-to-income ratio of 36% to 41% is quite reasonable. This means that you’re still fairly likely to get approved to borrow for a home if you’re in this range.

But once your debt-to-income ratio reaches 43%, Rocket says you might struggle to qualify for a mortgage. And if your debt-to-income ratio is over 50%, then your chances of getting to borrow for a home are pretty slim.

It’s best to crunch your own mortgage numbers

A mortgage lender may decide that your level of debt relative to your income is such that you’re still able to borrow for a home. But run the numbers and make sure that you feel comfortable taking on a monthly mortgage payment on top of the debts you’re already paying off.

If the idea of having to juggle yet another debt payment is overwhelming, then you may want to hold off on buying a home and work on paying off some of your existing debt first.

Remember, you know your finances better than any lender. Lenders have formulas they use to determine who qualifies for a loan and who doesn’t, but those formulas don’t speak to your personal comfort level with debt.

So, let’s say you’re already on the hook for $1,000 in monthly debt payments and are paying $1,200 a month in rent for a home. Taking on a mortgage and the peripheral expenses of homeownership, like property taxes, might raise your housing costs to $1,800.

You may be able to afford $1,800 based on the paycheck you bring home every month. But spending that $1,800 on housing could make it so that you have zero wiggle room for surprise expenses, which might creep up on you at any time.

Or, it could make it so you have little to no spending money for leisure and entertainment. That may not be the lifestyle you want. So it’s important to draw your own conclusion about the level of debt you can swing.

Consider paying down (or consolidating) debt first

You may be able to qualify for a mortgage even with a bunch of debt. But if you’re worried at all about covering a mortgage when you owe money to other lenders, put off homeownership for a bit of time and work on whittling down your existing debts instead. That way, you can feel more confident in your ability to cover your costs.

You may find that consolidating your existing debt via a personal loan makes it easier to manage and chip away at. And also, having a single loan payment each month to grapple with might make you feel more comfortable with the idea of also taking on a mortgage.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Sure, you may be able to pay thousands of dollars of college tuition with a credit card. But should you? Read on to weigh your options. 

Credit cards make payments easy. Once approved, you can buy anything on credit — even student tuition, should your college offer that option. But should you pay college tuition with a credit card?

More often than not, no. Generally speaking, it’s expensive. More on that later.

But there are situations where, sure, it might make sense to cover college expenses with a quick swipe of disposable plastic. Let’s explore when it makes sense to pay for college with a credit card and follow this up with alternatives.

You can pay for college tuition with a credit card

Here are three reasons to pay college tuition with a credit card.

Reason No. 1: Convenience

Paying with a credit card is quick and easy. Many colleges allow you to do so through an online portal. (For example, California State University Northridge lets you pay college tuition with a credit card through links on its official website.) To check, contact the school’s financial aid office.

If you find it challenging to get approved to borrow money or find free money (such as scholarships or grants) to cover 100% of your student tuition, you may use a credit card to make up the difference.

You can even consolidate student debt onto a credit card. But be wary of this — you may be exchanging a decent rate for a worse one.

More on this: What is debt consolidation?

Reason No. 2: Rewards

Credit cards often offer rewards. You can pay college tuition with a credit card to earn cash back or points for travel. This is an acceptable strategy should the following be true:

You can and will immediately repay the credit card debt.The rewards are bigger than the fees your college charges you for paying on credit.

Credit card debt is no joke. Interest is typically in the double digits, and carrying a lot of debt on your card could tank your credit score. You want to avoid that by paying off credit card debt within a month of use.

Colleges often charge you 2%-3% in fees for paying with a credit card. Are your rewards better than 2%-3% back? If not, you could lose money by paying with credit.

Reason No. 3: You’re waiting on money

Maybe you’re waiting for a family member to send you money, and in the meantime, you need to pay that tuition. A credit card can extend your payment date, covering the cost of tuition now so you can pay it off later.

If the extension is short — a month, say — this might make sense, since you won’t pay any interest. But your college may charge you a 2%-3% fee for paying with a credit card. And should your friend/relative/sponsor not pull through, you’ll be on the hook for paying off that debt.

Loans are typically cheaper

Depending on the loan, you can get better deals than credit cards. That’s because credit cards have higher interest rates and are frequently charged processing fees.

The best personal loans offer lower interest rates than those on most credit cards. Plus, you can avoid 2%-3% credit card processing fees by paying with personal loans. Consider applying for any grants or scholarships that might be available to you, as well — your school’s financial aid office can help. And be sure to fill out the FAFSA (Free Application for Federal Student Aid) to find out what you might qualify for.

What about smaller college expenses? You may want to purchase textbooks and make smaller school expenses. Some of the best student credit cards pay you to do so by offering you cash to maintain good grades. If you pay them back on time, this will build your credit score.

Bottom line: You want the best option available to you, right? Consider what it would cost to pay college tuition with a credit card instead of taking out a loan. Practice good debt repayment habits to keep your education affordable, no matter your choices.

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Not into budgeting? You’re not alone. Read on for a solution that may be a better fit for you. 

There are certain financial tasks you may not enjoy. Filing taxes certainly comes to mind. And writing a will is an important financial move to make, but it’s hardly a pleasant experience in most cases.

You may be inclined to lob budgeting into that same “I’m not enjoying this” category. Budgeting can be time-consuming. And let’s face it — it’s kind of boring. It’s not surprising, then, to learn that roughly two-thirds of Americans do not follow a budget, according to a Gallup poll.

Now, before you write off budgeting completely, you should know that many of the budgeting apps that are available today make it much easier. But if you’re anti-budget, worry not. You can still manage your money well and meet your financial goals — if you do one key thing.

An alternative to budgeting you might prefer

If budgeting is just plain something you don’t want to do, then don’t force yourself to do it. There are enough things you have to do in life, like go to work and mow the lawn and battle crowds at the DMV. You don’t need to pile onto that unpleasantness by making yourself sit at your laptop and pore over a spreadsheet that maps out your monthly expenses.

A better and easier bet? Automate your savings. It will essentially have the same effect as budgeting, only without the annoyance.

The way to do this is simple. Decide on a savings goal that will help you meet your near- and long-term objectives. That could mean setting $300 a month aside each month to build up an emergency fund or allocating $500 a month to retirement savings. Then, put the process on autopilot so that money leaves your checking account after each paycheck arrives, before you get a chance to spend your incoming cash.

The whole purpose of setting up and following a budget is to be able to do things like fund your savings or IRA. But if you’re able to do those things through automatic contributions, then why put yourself through the hassle of budgeting?

Those who are pro-budget will warn that if you don’t stick to one, you might end up wasting money or spending more than you think you are. But if you’re meeting your financial goals, is that really such a terrible thing?

Sure, it may be that without a budget, you inevitably end up spending $300 a month on leisure when you expect to spend $200. Or your grocery bill for the month might come to $420 instead of $400. But if you’re sticking to your financial goals, who cares? Go enjoy life without having to sweat the small details.

There really is a better way

It’s easy to see why so many financial planners encourage people to budget. But if you’re not into the idea, know that automating your savings could easily take the place of budgeting without subjecting yourself to the tedium of having to review your expenses month after month.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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I bonds aren’t necessarily a great investment at this point. Read on to learn more. 

Many consumers spent the better part of 2022 and early 2023 stressing out about inflation and the higher credit card bills it inevitably led to. But in recent months, inflation has cooled nicely. And in June, annual inflation was measured at 3%, as per that month’s Consumer Price Index.

But while falling inflation may be providing relief to consumers, it also makes I bonds a less appealing investment choice right now. So before you put money into I bonds, you may want to consider other options.

Do I bonds still make sense?

I bonds are government-backed securities whose interest rates are tied directly to inflation. When inflation was surging last year, I bonds were a solid buy. But at this point, they’re a bit more iffy — not just due to slowing inflation, but due to the generous interest rates banks are paying.

Right now through Oct. 31, I bonds are paying 4.3% interest. And that’s not a bad return for an investment that’s considered virtually risk-free.

But come Nov. 1, the interest rate on I bonds is going to reset. And chances are, it’s going to be a lot lower than 4.3% given where inflation is these days. Because of this, you may not want to commit your money to I bonds.

I bonds must be held for at least a year before redemption. So at a minimum, you’re making a 12-month commitment. But you should also know that cashing out I bonds before having held them for five years will result in penalties. And since economic experts aren’t anticipating another near-term surge in inflation, it may not make sense to tie up your money in an asset that isn’t going to be all that lucrative.

Some other options to consider

The appeal of I bonds is that at least right now, they deliver a relatively high return with minimal risk. But if you want another risk-free option for your money, you can look at opening a CD.

CD rates are higher these days than they’ve been in years. And if you stick to an FDIC-insured bank and limit your deposit to $250,000, you won’t risk losing out on principal.

Meanwhile, many CDs are paying around 5% interest for a 1-year term. So it could make more sense to lock in a CD than to put money into I bonds, since you’ll face penalties with the latter for cashing them out before the five-year mark.

Another option to look into is opening a brokerage account and loading up on stocks. Going this route will mean taking on risk — a lot more risk than you’ll be looking at with I bonds or CDs.

But you should also know that over the past 50 years, the stock market’s average return has been 10%, as measured by the S&P 500 index. Compare that to the limited-time 4.3% return you can get from I bonds, and it’s clear that in the long run, stocks have the potential to do a lot more for your money.

All told, I bonds don’t make the most sense right now because inflation is down and is expected to keep declining. If CDs weren’t paying so generously right now, it would be easier to make the case to invest in I bonds for those who are very risk-averse. But given where CD rates are currently, they read like a much better choice at the moment.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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