Pay off Credit Card Debt... or Keep Cash in Bank?

If you're looking at co-ops then opt for the more cash/less debt scenario. Keep in mind that most co-op boards won't want to see a debt-to-income ratio higher than 25%.

Banks and even coops are pretty savvy. They look what kind of debts you have and with regards to buying both front end and back end debt service coverage ratios. So they want to know your ability to service the basic mortgage, the full costs of owning including common charges etc and how much free cash flow you have along with emergency assets. While there's always the potential to game a formulaic approach, you might wind up making one metric look better and another worse or in other words, wasting your time.

A co-op will look at the fact that you have cc debt and rightfully conclude you are an irresponsible person financially. Wait 6 months and get the cash you need without taking on silly debt that is the province of the financially desperate in the US.

MS, IMHO, if you plan to put that $20k on your credit card, have you factored in the interest cost of carrying that much monthly? Assuming you even have a low rate card (non introductory rate) at say, 12% (18-22% is much more common), you've basically stuck yourself with a negative arbitrage situation in one month alone. In such a low interest rate environment, that would be one of the most imprudent financial decisions one could make. You would literally be throwing money away, or burning it, whichever analogy you prefer.

Forget the co-op board and debt-to-income ratios...that is simply bad math/poor economics. Good for you for having ZERO credit card debt...most prudent financial decision here is to keep it that way!

Also just occurred to me that the IRS takes a nice little fee when you pay taxes with a Credit Card, don't they? That fee quickly offsets any benefit you get from generating mile/points...etc. It's the IRS, they're too smart for you to game them like that...

Definitely pay off your credit card debt first. I'm the treasurer of my co-op, and bramstar is correct, you want that debt-to-income under 25%.

That, and what fieldschester said. And Riversider and NYC make excellent points. There's no two ways about this.

Disclaimer: I've been doing this every year for the past few years.

Every January I pay my tax bill w/my cards. I then pay down the balance by early summer (my business is slow this time of year, but picks up again in the spring).

Will the co-op board look back and say "hey, why do you run up a 15-20K bill every January?"
(I think the answer to that question is probably yes.)

Will my answer look bad when I tell them it's because I purposely underpay my estimated taxes to have more cash on hand during my slow business season?

Getting back to the point of my post: I am only concerned about board approval. Banks approve people w/CC debt all the time, and since the amount I'm talking about is around 30% of my total credit limit, it won't raise any red flags. Credit scores only drop if the level of debt rises above 50% or so (I've monitored my credit every time I've done this, and it hasn't changed by more than 10 points).

To reiterate my original post: even with the additional debt, my ratios will be very strong. I'll easily pass the 4:1 required by most co-ops. Also, I'm not looking at Park Avenue or Central Park West. Here the extra 20K makes a huge difference (ups my price range from 350K to 450K) so it can significantly affect the type of property I can get into.

Yes, NYC10007 there are transaction costs, but I think it's worth it because of the greater flexibility I'll have. I'm really just concerned about the implications, since I've already been doing this over the past few years.

fieldchester:: I hope that a co-op is smart enough to look at credit history over a long period of time. I've paid multiple car leases, student loans, all sorts of credit cards, etc. and have never missed a payment. I have a history of running up a manageable amount of debt for a few months then paying it off. This isn't irresponsible behavior. It's taking advantage of my good credit.

Also, everyone keeps mentioning the ratios.

I'll say it again: I'll still comfortably meet the 4:1 ratio even with the additional debt.

The co-op will see that you are effectively self-employed, wonder why you're underpaying your quarterly taxes, and come to a conclusion that because you had been underpaying throughout the year and paid your taxes via credit card you could not afford to pay them in full at the time they were due, and therefore you are too great a financial risk.

Cash is king.

MS, sounds to me like you're pretty set on going the route of floating the debt. Bottom line, most co-op boards will likely make a point of it...most of the advice here has been to eliminate the debt, but you're clearly arguing that the cost of the debt is less important to you than having the cash on hand.

I, for one, am an advocate of underestimating tax withholding, however, that means you're borrowing from the IRS at zero percent while theoretically preparing yourself to true up by April 15. In your case, you are borrowing money at a high rate in order to make that true up payment. That is the part that is eating into your net profit. If you borrow from a reasonably priced warehouse/credit facility, that could be smart business, but if you're borrowing at CC rates, that cost of capital will quickly negate any longterm benefit you think you're getting from this play.

I know nothing about what you do and have no right to judge any of this, but from what you've told us and what you're asking, you should consider rethinking your overall debt/cash strategy.

pay off the debt

Forget the ratios. Many people serving on co-op boards do not have extensive financial knowledge. They can be easily confused by anything complicated, and the default answer to any question is the safe choice of "no," regardless of how much sense your financial engineering makes to a person skilled in the art.

As an aside, when you say you'd have $70k of cash for a down payment, are you not counting amounts reserved for post-closing liquidity? You'd mentioned a price range of $350-450k; at the low end, a 25% down payment is $70k, but the board will want to make sure you have a cushion after closing. Given your employment situation, there's also a very real chance they want you to escrow some amount of maintenance payments.

Not trying to rain on your parade but important to think about these things.

Speaking of financial illiteracy, 25% of $350k is $87.5k...

Here's a slightly different way of thinking about it:
- instead of a credit card loan you could get a personal loan
- instead of a personal loan you could put less cash down on the apartment and borrow more via the mortgage
- in the end, what's the difference? it's all borrowed, either secured or unsecured
- but the mortgage debt-to-equity ratio is important to both banks and buildings/boards
- so borrowing it from one source as opposed to another probably shouldn't change the coop board's assessment too much, once they dig into the details and the interplay between your personal finances and your business's finances

If you want to take the loan and go apartment shopping, fine. Be prepared for the scrutiny, first from a seller and second from a board. Know that it may not work out -- for this reason or others relating to your business's cash flow, prospects, stability, etc. The cost of the credit card interest will be the price of shopping sooner, versus waiting for the cash to truly accumulate. You will need to ensure you have good contingencies in the contract to avoid losing your deposit.

Guys, stop saying "eliminate" the debt. I don't have debt. I'm just toying with the idea of taking on some debt for a few months.

NYC10007: I've been doing this for the past few years. The question was really if I should keep doing it since I'll be buying an apartment soon. Also, for some reason I get a lot of "0% for new purchases" deals on my credit cards, that's what makes this appealing. It makes sense financially.

Aaron2: Yes, cash *is* king. That's why I'd rather not part with it.

flarf: Yes I've taken into account closing costs, and have additional savings to cover at least six months of housing payments.

Word on my employment situation: I have a full-time day job and a business. I can afford the apartment on my salary from day job alone. The business is extra.

So I'll now rephrase the question:
If I have 20% down payment, a nice cushion of cash leftover after closing, 790 credit, about 6:1 income:debt ratio, and about $20K in credit card debt, would you reject?

Thanks for all your great insights!

My point is for a co-op board its better to not have the debt. I would imagine that banks would feel similar.

I'm the treasurer of our board and agree with the other posters. I see your new information, but 6 mos. of housing payments likely isn't sufficient, a great deal of boards will want at least 2 years of mortgage and maintenance costs liquid and if you are on the margins, be prepared to escrow something. I would not put your taxes on a credit card, 20K in cc debt would be a red flag to me, as would continually underpaying your estimated taxes. Hope this helps.

Two years mortgage+maintenance sounds hefty.

Does it matter that I'm purchasing in the Bronx (not Riverdale)?
I mean, some of the buildings even allow 10% down...

It may be less in the Bronx, others here can weigh in, but 6 mos is really light anywhere, that's about minimum a bank will want in reserves(although they will count some portion of retirement funds, coops will not). Sounds like you need to save more or consider condos.

I'm gonna save more. This is all really preliminary... just good to know how to plan.

I wish I could afford a condo.

Where in the BX? Not exactly but neighborhood - i.e Castle Hill, Country Club, Morris Park etc.

6 months is fine outside of Manhattan, Astoria - Forrest Hills - LIC of Queens, and most of BK nowadays.

You would need to speak with the management company that runs the co-op you're interested in to see what their guidelines are. In Manhattan, you need a minimum of 2 years maintenance plus mortgage unless it's a small co-op and they're a little more flexible. But as said before, these guidelines Aside from the debt to income ratio that you have covered, will be faded significantly outside of the city and the "trendy" spots in the outdoor boroughs.

I want to buy in the South Bronx, near Yankee Stadium.
Buildings like 800 Grand Concourse, 1020 Grand Concourse, 675 Walton, 828 Gerard if you know the area.
I see great potential for this neighborhood, given the fact that it's a rapidly-gentrifying historic district and it's only one stop from Manhattan.

I currently live in Washington Heights, and I *love* it. It's just really inconvenient (I need both east and west side subway access).

it's about you, though--what if your business goes south? you could burn a few months figuring that out, and a few more finding a job.

save more, then make your move.

I wouldn't use a Visa credit card to pay my regular bills other than as a charge card unless there was a truly difficult situation.

@ms_w71 - yup near BJs. Good for you. I know the GC well - family lived just off the Concourse and had a deli as well as card shop on Valentine. You're further down but back spot on IMO...the buildings there are similar to those on the UWS. Much better than that of anything BK brings to the table or Queens for that matter. Are you from NY? I ask because I too believe the upside there is great. Curious, are you from outside of NY?

If you're buying a coop, you have to consider the minimum % of down payment and the front end/back end debt to earnings ratio mandated by the Board. Many coops have become very conservative in the past few years.

I think optimal cc utilization is 10%. If you carry 30%, it could impact your credit score and your ability to secure the best financing terms. If your score is over 780 with 30% cc utilization, then I'm wrong.

I'm a native NYer. The potential for the Grand Concourse is certainly there, but it will take a long time. I'd rather buy in Brooklyn but it's just too expensive.

REMom, yes I've done this over the past few years. my score dips to 770/780 when I'm utilizing 30%. Goes back up to 790 after it's paid off. My concern isn't the bank; I know I'll be able to get a mortgage (income, credit, ratios are all perfect for the loan amount I'm considering). The question was really about co-op boards, which are stricter than banks.

It seems from responses to this post that even a scant 10% CC utilization is a no-no for co-ops. That was my question, and the answer, to not carry any CC balance at all, was the expected answer.

Oh, for heaven's sake. I'm a freelancer and have been for nearly a decade now, and during that time I managed to buy an UWS co-op.

It is not at all unusual for freelancers to employ cash management strategies like the one you described, and certainly $20K of CC debt is not an automatic reject, especially given that your financials are otherwise clean and sparkly.

A situation like this is really going to depend on the building -- some of the swing factor is going to be whether there are freelancers/small businesspeople on the board or not -- so you should be guided by the listing agent.

I wouldn't automatically assume that you need to pay off your entire credit card debt before purchase. I would certainly leave the debt and keep the cash until you find a target property and the listing agent guides you to pay it off.

Whatever the response, you will probably -- note the probably here -- want to have a letter from your accountant, stating that your business/schedule C earned $XX in 2013, and that he/she expects it to earn $XX in 2014. Certainly if the business is growing, you'll want to point that out in your cover letter.

ali r.
DG Neary Realty

>want to have a letter from your accountant, stating that your business/schedule C earned $XX in 2013, and that he/she expects it to earn $XX in 2014.

Accountants making representations on future years performance? That's funny.

Not quite your question, but we funded about $75K of our renovation with 0% cash advance checks from credit cards. We rolled this debt around for years, and even refinanced our mortgage while it was outstanding. Bank couldn't care less so long as it was all disclosed and the ratios worked. Let us keep our money in the stock market.

I personally don't see any problem with saying that you borrowed the money as a business debt because the interest rate is low, and that it's manageable given your assets and cashflow (assuming it is).

fieldschester: yep a CPA letter typically breaks down earnings and projects future earnings.

This is very standard for freelancers/self-employed/small biz folks and replaces a "Letter of Employment".
(I got a CPA letter when I needed approval for a rental.)

THANK YOU mucuk for that post!!! Those 0% checks certainly do come in handy. :)

You're lucky to get a real 0%. I get mail from my CC banks all the time, trying to get me to write a 0%-for-a-year check, but in the fine print there's always a 3% or 4% fee. One offer had a 2% fee, and that was the closest offer to zero.

I do believe that there are pros and cons to this situation. It seems that prices could rise and so could interest rates( as they already have, and may still have more to go) therefore you may be saving money buying sooner rather than later, therefore the need for more cash. I agree with mucuk, that one should take advantage of cheap money, the rich are doing it like crazy.

That said I know a sponsor that needs to sell some of his unsold units in the Bronx. If interested, feel free to email me.

Ellen Silverman
esfundingco@aol.com