Credit Card Debt Derails Homeownership — Here's How to Take Control

Katy Byrom

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Katy Byrom

October 11th, 2022
Updated October 11th, 2022

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Headlines often focus on student loan debt as a barrier to homeownership — but what about credit card debt? A new study from Anytime Estimate finds that one in five debt holders say credit card problems have prevented them from buying a house.

Moreover, a survey from Rocket found that credit card debt actually outranks student debt as a barrier to home buying — despite the fact that the average student loan debt is 4.75 times higher than the average credit card balance carried over month to month ($28,950 vs. $6,093).

Here's what makes credit card debt so detrimental to homeownership, and what you can do to dig yourself out of that financial hole.

Woman with pained expression holding a credit card and phone

How credit card debt hinders homebuyers

1. Using a credit card doesn't pay off like business or student loans

Unlike business or student loans, there's no inherent income advantage to taking on credit card debt.

To explain what we mean here, the typical college grad makes about 84% ($36,000) more per year than those with a high school diploma. The college wage gap is even greater among earners ages 22 to 27, totaling $54,000 per year. So while student loan balances are significantly higher than the average outstanding credit card balance, the extra monthly payment owed by a college grad is dwarfed by their additional earnings.

On the other side of the income spectrum, those without a college degree have to allocate more of their monthly income toward living expenses like rent, phone bills, groceries, and gas. Those items cost the same whether you went to college or not. Per Anytime Estimate's findings, about half of those who missed a credit card payment in the last year did so to cover basic necessities.

As Americans struggle to keep up with rising inflation, the proportion of credit card borrowers falling behind on their payments could grow even higher. Taken together with record-high home prices, one in three millennials who don't currently own a home fear they'll never be able to afford one.

2. Credit cards carry some of highest interest rates around

Credit cards come with some seriously high APRs, averaging 15.56 to 22.87%, compared with 3.73 to 6.28% for federal student loans. Given that credit card interest adds up about 3 times faster, you can easily owe more per month on a much lesser principal balance.

Also, student loan programs allow for forbearances — essentially letting you put your payments on hold without penalty in times of hardship — but credit card lenders offer no such benefit. As soon as you get 30 days or more behind on your payments, you're considered delinquent, which harms your credit score. (More on that below.)

Credit card debt is one of the least forgiving debt types, so it's no wonder that 1 in 4 borrowers surveyed by Anytime Estimate say that paying down their credit cards has taken priority over paying other debts (including mortgages and student loans).

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3. Credit card debt hinders future savings

According to Anytime Estimate's findings, 26% of those surveyed report that credit card debt has prevented them from building adequate savings — another frequently cited barrier to homeownership.

While the same could be said of any type of debt, some borrowers find it makes more financial sense to invest a portion of their income in stocks or other investments while still paying off their low-interest student debt.

The average stock market return over the past 30 years has been a little over 10%, while the average interest accrual on student loans sits at 4.12% — meaning borrowers would have netted more from investing in total market index funds (those that rise and fall with the market) than from putting everything toward their remaining student debt.

On the contrary, credit card debt accrues at a much higher rate than the typical rate of gain you'd see from the stock market. Therefore, it rarely makes sense to channel money toward investments before paying off your credit card debt in full.

4. Credit card debt impacts your interest rate on future borrowing

When determining your credit score, credit bureaus look at two types of credit:

  • Installment credit, like student loans or car loans that you consistently pay off over time
  • Revolving credit, like credit cards, which replenish your credit limit every month

As long as you are easily able to make the monthly payments on your installment loans given your current income, the overall balances won't hurt your credit score. However, your use of revolving credit is more heavily scrutinized. In fact, it's the second most influential factor composing your credit score.

"Thirty percent of your FICO credit score is based on your credit balances," says credit coach Jeanne Kelly. When it comes to applying for a mortgage, lenders prefer to see a credit utilization ratio of less than 30% — meaning that, rather than maxing out your cards each month, you keep your balances to less than a third of your total credit limit.

Credit bureaus also track your payment history, which accounts for an even larger 35% of your credit score. If your credit card balances are high, and you start missing payments, expect your score to suffer.

To provide a sense of just how important your credit score is when applying for a mortgage, let's imagine you want to buy a house listed at $500,000. You've saved enough to make a 20% down payment but need to take out a loan to cover the remaining $400,000.

The website MyFICO shows you what your monthly mortgage payment will be based on various credit score ranges. "You can see the difference in the loan tables," says Kelly.

Monthly payment and interest on $400,000 home loan, based on credit score

FICO Credit Score
APR*
Monthly Payment
Total Interest Paid
760–850
6.023%
$2,404
$465,483
700–759
6.248%
$2,462
$486,445
680–699
6.428%
$2,509
$503,370
660–679
6.645%
$2,567
$523,953
640–659
7.081%
$2,683
$565,882
620–639
7.635%
$2,834
$620,214
*Interest rates as of September 23, 2022 | Source: MyFICO

With an upper echelon credit score of 760 or above, your monthly payment would be right around $2,400. With a credit score of 620 — the minimum you need to qualify for most conventional loans — your payment would jump by more than $400 a month.

Over the 30-year life of the loan, you'll end up paying an extra $154,731 in interest for the same house — all because of a poor credit score.

At the average rate of return, that same $400 a month invested in stocks could net you $904,261 over the same 30-year period.

How to dig yourself out of credit card debt

The good news is that lowering your credit card debt is possible. One single mom famously paid off $64K in credit card debt in just two years. Is it going to require sacrifice? Absolutely. But, as Clever economist Danetha Doe reminds us, "it can also be an exciting time working toward your goal."

Doe recommends starting off with a specific monetary goal in mind. This may require you to review your different credit card balances to figure out exactly how much debt you need to pay off. From there, she advises, figure out two or three strategies that you can apply to start making progress today.

Here are a few suggestions from business and finance experts.

1. Cut out unnecessary expenses

"Do you really need that gym membership or cable TV package?" asks Philadelphia property investor Rinal Patel. To get rid of debt, "Why not cut out these non-essential expenses and redirect that money into paying down credit cards? Then, as much as possible, find free or low-cost alternatives for the things you enjoy."

Patel also suggests looking at ways to temporarily downsize your lifestyle. This might involve moving to a smaller place, getting a roommate, or downgrading your car in exchange for a lower monthly payment.

Entrepreneur Nunzio Ross suggests paying close attention to your monthly subscriptions. "Recurring bills from your streaming services, home security, video game subscriptions, and more can pile up monthly without you even realizing how much you can save from them," says the Majesty Coffee CEO. "Instead of multiple streaming services, consider rotating them to when your favorite shows or movies get released. Other services you only occasionally use can also be cut from your monthly expenses."

Financial adviser Caleb Reed suggests doing a no-spend challenge to kick-start your savings. "Also known as a spending freeze, this is a period, such as a month, in which you challenge yourself to completely quit spending on discretionary expenses," explains Reed.

Discretionary spending might include food delivery/eating out, entertainment, clothing, and other non-essentials. While extreme, this approach might help you build early momentum by returning several hundred (or even thousands) in savings early on, as opposed to a few extra dollars here and there.

One important thing to remember is that these sacrifices are temporary, and will ultimately get you to your long-term goals much faster.

2. Consider getting a (temporary) side gig

Ideally, says Doe, you'll want to balance trimming down expenses with adding an additional income stream. "A lot of financial blogs put the emphasis on cutting costs," she explains, "but the reality is, you can only save so much."

Given that rent, utilities, food, and transportation are non-negotiables, the real momentum may come from securing a second job — even if only temporarily, while you pay down your debt. Fortunately, you have a lot of options in today's growing gig economy.

Have a knack for writing or web design? Enjoy baking or photography? Have some previous experience in accounting? How about a love of arts and crafts? From Etsy to Upwork, there are a variety of forums that allow you to earn extra cash through a skills-based side hustle.

Many side gigs don't require any specialized expertise. Have nice handwriting? You might be able to sell your services creating hand-printed invitations for things like weddings and anniversary celebrations. (At Clever, we recently had a colleague go off to pursue his calligraphy side gig full-time.) Other forums like TaskRabbit let you set your own rate for things like organizing rooms, providing clerical assistance, putting together furniture, or helping with a move.

Then, there are the more conventional avenues of running errands, dog walking, tutoring, babysitting, or signing up as a driver with Uber or Lyft. If childcare is an issue, consider a family-friendly gig like pet sitting or grocery delivery through apps like Rover and Instacart. You can even scour local auctions for practical items to resell on eBay or Offer Up.

Depending on the gig, you could earn anywhere from an extra $100 to $1,000-plus per month to put toward your credit card debt.

3. Decide on a repayment strategy

As you rack up savings from cost cutting and extra income, it's best to have a strategy for how to apply those savings to your debt.

"I'm a big believer in the snowball method of debt repayment," says Melanie Hanson, Editor in Chief of EDI Refinance, "where you devote extra money each month to paying off your smallest debt first, then move on to the next-biggest one with your extra money, plus whatever you were paying on the smallest loan."

Other often-used strategies include focusing on paying off your highest interest loans first and consolidating your debts into a single monthly payment.

A credit counselor may be able to advise you on which strategy will be in your best interest. Both the National Foundation for Credit Counseling and the Financial Counseling Association of America offer access to accredited financial counseling services, many of which are free through area nonprofits.

4. Increase the frequency of your credit card payments

One approach to cutting down your credit card debt is to pay off your card as you spend. If you see your bank balance going down with every charge you put onto your plastic, you might think differently about your spending.

The same applies to savings. As soon as you get a certain amount from a cut expense or a side job, put the extra into your debt payments.

The pay-as-you-go approach may have the added benefit of boosting your credit score. Credit card companies report balances to credit bureaus monthly. If they happen to report at the end of a billing cycle, your credit utilization may look consistently high — even if you pay your balance in full each month.

Simply paying your credit balances before the bill is due could boost your credit score by several points.

To help with this strategy, try setting up credit alerts to trigger a payment whenever your balance surpasses a certain threshold — or simply get in the habit of making payments on a weekly or per-charge basis.

5. Have a plan for once you get out of debt

Becoming debt-free is a huge accomplishment, and definitely warrants celebration. However, without a plan for keeping the momentum going, you risk falling back into old habits.

Once you've paid off your debts, suggests Hanson, "a savvy next step is to put all of that money into savings each month. This is a strategy that will result in a huge savings windfall, all without ever changing your monthly budget."

Doe recommends setting a separate savings goal — such as saving for a down payment — and breaking it down by a timeline.

"First step, figure out a rough ballpark of how much you need to save," says Doe. "Is it $100,000? Is it $50,000? Second, consider how long you need to give yourself to reach that goal. From there, you can figure out how much you need to save each month to reach that target number."

Doe also suggests opening a dedicated account and reviewing it weekly to track your savings. "With that foundation set," she advises, "ask yourself what is one thing I can do today to move toward my goal?"

And, says Doe, "try to bring as much joy to the experience as possible. That may mean visualizing what you're saving for or talking with people who have figured out how to reach a similar goal. Surround yourself with positivity."

Keep your mind on the desired outcome and commit to making a little progress each day. When you do that, Doe concludes, "a seemingly insurmountable savings goal will soon feel like an approachable one."

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