In the calculation of the back-end ratio (total debt to income), you're supposed to include all debt obligations (e.g., credit card, car payments, student loans, alimony, etc.). However, I haven't seen anything on the web regarding how to treat credit card payments. In cases where the credit card is used more like cash, e.g., it's paid off in full every month and no balance is carried, should this figure into the calculating total debt? I'm curious because in this case, the credit card captures things that are more like rolling expenses that can be adjusted every month (like a food or gas expense) rather than payments that a required.

  • Underwriters may look at your total credit limit (whether you have high or low utilization ratio) as one factor to determining your total debt. – ChuckCottrill Dec 19 '13 at 23:15

You'd imagine that if you showed a track record of pay-in-full for say, a year, it wouldn't count. In my experience, the bank treated the snapshot balance off the credit report as if you'd carry it. So, a $5000 balance was treated as a $100/mo obligation.

If I were cutting it that close, I'd pay in full the day prior to the statement being cut.

  • Keep the utilization ratio below 30% (always), and you are (probably) golden. – ChuckCottrill Dec 19 '13 at 23:15
  • <20% is the target that site like Credit Karma suggest is the ideal. – JTP - Apologise to Monica Dec 20 '13 at 0:01
  • Since Fair-Isaac refuses to expose their formula, Credit Karma is as good as sources I have heard (which quote percentages of 20%, 25%, 30%). Use 20% to be conservative. – ChuckCottrill Dec 20 '13 at 0:35

I contacted Rick Harper, who runs some workshops in San Francisco around Housing Education and Consumer Credit. In his reply, he said that only the minimum payment counts towards debt. So say you carry a $5000 balance, but the minimum payment is $25. The amount of credit card debt you use for the back-end ratio would be $25. This seems to make sense since that's the amount you're obligated to pay before the bank starts doing things like increasing the rate.

What this doesn't capture is the total debt load. For example, someone can keep running up their credit card balance, but none of that would show up in the back-end ratio calculation. But I guess the same is true for the other forms of debt (e.g., for the car loan, it's the monthly obligation that matters, not the total amount). But I'm sure the total amount of debt is factored in when the underwriter decides whether to fund the loan. Also, the total amount of credit card debt someone could take on would be capped by the credit limit.

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    your example has an minimum payment of 1/2 of 1% , typical minimums are 2% or 4%. – mhoran_psprep Dec 16 '13 at 20:29
  • @mhoran_psprep - pretty sure he was merely simplifying the math :) – warren Dec 17 '13 at 14:16
  • You should also mention that the credit card utilization ratio affects the borrower's credit score (30% is utilization ratio). – ChuckCottrill Dec 19 '13 at 23:13

Just about every article or online calculator talks about revolving debt being part of the calculation--I've never seen one that said anything about non-revolving debt or spending habits affecting borrowing limits.

Here is one example of a calculator that says not to include non-revolving debt (note that I'm not claiming this to be a reliable source):

If you are making minimum payments on a credit card, then enter that amount here because this type of arrangement is similar to a loan. If you're paying off the balance on your credit card each month, then you would not enter that amount here.

All that said, I have no first-hand knowledge of whether underwriters actually look at this information or not, and don't have a definitive source one way or the other.

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    +1 - my first hand experience. When I was dealing with underwriting the minimum payment was the number they specifically requested. It is just an anecdote; my bank and my transaction. – MrChrister Dec 18 '13 at 16:46

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