This is my online journal documenting my attempted escape from debt hell. If you think that applying the term "hell" to being in debt is too extreme, you've probably never come close to the point of no return.Please feel free to follow me on this escape mission, maybe all of us will learn a thing or two along the way.

Friday, March 14, 2008

Today's Life Lesson: Unused Credit Goes Against Your Debt-to-Income Ratio

So far, no calls from creditors today!

I called a bank today to explore the possibility of consolidating some high interest credit cards into one lower interest payment. I did not apply since I knew I would likely be turned down. I explained my situation to the person I spoke to and he was very helpful. We took a look at the situation, and he determined that my debt-to-income ratio was too high and that would make approval a virtual impossibility. He went on to explain that though my actual debt alone would not preclude me from getting the consolidation, the problem was all the unused credit I had on some of my accounts!Your credit limits are considered a part of your debt! For example, I had an $8000.00 limit at one of the major furniture stores, and my actual used credit was only about $2000.00, so that $6000.00 difference was one of the things standing in the way! I had that reduced. I also have a Sears card with a $6900.00 limit of which I have used less than half, so I was able to reduce my limit there by almost half. I also closed an account outside the province which had a $5000.00 limit, but which had a zero balance and had not been used in two years, nor would ever be used again.
Even with these accounts reduced or closed, I would still have a problem since my debt-to-income ratio was still too high, so I will have to attack a few cards according to the debt snowball plan. It was also reccomended that I close the accounts once they are paid too, since the bank would be reluctant to provide the unsecured loan on the other balances against the risk that the cards could be run back up again.
The other advice he gave me was to make sure that all my accounts were paid on time for the next 3-4 months, and combined with the reduced debt-to-income ratio, my FICO score would be on its way up again.
I have decided that once I am debt free, I will never, ever , ever go into debt again, so the only reason I care about my FICO score is for the next time I apply for a mortgage, I will qualify for the best rate possible. However, consolidating my high interest debt into a low interest LOC will make the actual payoff that much easier.

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