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The debt domino effect of homebuying

Jose Luis Pelaez | Getty Images

These days, buying a home means taking on a lot of debt, yet many consumers are quick to add to that burden with a new car and hefty credit-card spending at the same time.

That's the debt domino effect, according to a recent study by TransUnion, the credit-scoring company, which showed that those who refinanced or sold one house and bought another were much more likely to also increase their credit-card spending and car purchases.

Rather than reel in their spending as they approach one of the biggest financial commitments in their lives, consumers are charging more on their cards in the months leading up to a move, said Charlie Wise, co-author of the study and vice president of TransUnion's innovative solutions group.

"Whether it's to purchase furnishings or for renovations, many consumers actually increase their card spending in the months before moving into their new residence," he said.

Consumers who apply for a new mortgage are also two to three times more likely, on average, to open a new auto loan or credit card account over the next year, and often within the first month, the study said.

The study found that new credit card originations for consumers who moved into new homes were 54 percent higher in the month immediately after getting a new mortgage. New auto originations were 84 percent higher in that same time frame.

"The folks that are refinancing are lowering their monthly payment and giving themselves a raise, and they're spending that," Wise said. "They now have additional cash flow."

Meanwhile, near-record auto sales have pushed the amount of money borrowed to buy a car to over $1 trillion nationally for the first time ever.

For lenders, this means there's a valuable pool of potential new borrowers with higher demand for credit cards and auto loans when they refinance or move, Wise said.

But for home buyers, accumulating a large amount of debt over a short period of time can have devastating consequences to their credit score, according to Angus Martin, a marketing specialist at ConsumerAffairs, a consumer news website.

On the heels of a mortgage application, applying for more loans can cause a 700+ credit score to drop over 100 points, he cautioned. "Credit approvals can quickly come to an end as creditors realize that a consumer is grossly overextended," he said.

TransUnion's study included 16.7 million mortgage applicants with an existing mortgage — those who were likely moving or refinancing between 2013 and 2015. TransUnion did not include first-time home buyers.