Having a debt for any financial or medical emergency is one of the most obvious decisions we all make. And when the amount you need is significant enough, considering a credit card becomes the only option.
Seemingly a favourable option for many billionaires, owning a credit card is not easy. You have to manage the debt responsibly, especially before applying for a home loan. This can include things like paying EMIs on time and consistently and not adding more debts to your credit account.
This blog explores how lenders evaluate credit cards and the various ways credit card debt impacts your home loan application. It also provides actionable tips from Axton Finance brokers on how to manage credit card debt effectively.
Things Lenders Check If You Have a Credit Card
Lenders go through a credit score report, analyse the debt-to-income ratio, and credit utilisation ratio to check if your credit card due can impact your mortgage approval process. However, it is important to remember that having a credit card is not a bad thing in any case.
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Checks Your Credit Score
Besides checking your income, employment status, assets, liabilities, and overall debts, a lender also keeps a close eye on credit score. As a matter of fact, a score above 600 is considered safe and good for lenders approving your home loan application.
But that’s not enough. Lenders evaluate a credit score report to see your credit history, the credit card balances, how long you have been using the credit card. Also, the money lender checks if you have been making any recent inquiries about a new credit account.
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Debt-to-Income Ratio
The debt-to-income ratio (DTI) is a percentage measure of your monthly debt payments to your monthly gross income. If you have a credit card, lenders will calculate the Debt-to-income ratio to understand your borrowing power.
A lower DTI ratio simply indicates that you can manage your debts effectively. In this case, they will compare the minimum credit card dues you have to pay with the monthly income you are generating. Axton Finance brokers can better advise and help you in planning for keeping your DTI ratio low.
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Credit Utilisation Rate
Credit utilisation rate is the ratio of your available credit card balances to your total available credit limit, expressed as a percentage. It is a key component of your credit score, accounting for about 30% of the total calculation.
Maintaining a low credit utilisation rate indicates that you are not highly relying on credit and can manage your available credit responsibly. Financial experts generally recommend keeping your credit utilisation rate below 30%.
Direct Impacts of Credit Card Debt on Home Loan Applications
Here are the following ways in which a credit card dues can directly affect your home loan application.
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Existing Credit Card Debt Reduces the Amount You Can Borrow
If you are paying your monthly credit card payments while applying for a new home loan, creditors might consider you as a risk-taking borrower. That is because having an outstanding dues on credit cards, no matter how big or small, does impact your ability to get more debt. In some cases, if you still get successful with approving your home loan through a mortgage broker in Kew, you will only receive the lowest borrowing amount.
Lenders want to ensure that you can comfortably manage your mortgage payments along with your existing debt obligations. The more debt you have, the higher your monthly payments, and the less income you have available to cover a new mortgage.
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Higher Interest Rates
Lenders use risk-based pricing to determine the interest rates for home loans. This means they evaluate the risk of lending to you based on your credit profile, including your credit card debt. If you are not paying credit card bills on time, skip them after paying for a few months, and have higher credit card limits, things can get unfavourable.
Borrowers with high credit card debt might struggle to manage additional debt, leading to potential late payments or defaults. For this reason, lenders charge higher interest rates, ensuring they receive adequate compensation for the increased risk. Finding a mortgage broker in Kew to consider low-interest loans is usually the first step you must take in this case.
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Rejects Your Home Loan Application
High levels of credit card debt can lead to the outright rejection of your home loan application. Lenders look for signs that borrowers can manage their financial obligations responsibly. If your credit card debt is too high, it also means that your DTI ratio is high enough, more than 40%, to make you only dependent on credit card balances. This perception can result in the lender rejecting your application to mitigate their risk.
Steps to Manage Credit Card Debt Before Applying for a Home Loan
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Pay Your Credit Card Balances:
If you have more than two credit cards, focus on paying credit cards with higher interest rates first. While doing so, remember to pay off the minimum monthly dues on other credit cards as well. This will reduce the total interest you will pay over time.
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Transfer Higher-Interest Cards to 0% Introductory APR:
If you are unable to pay off the significant interest amounts monthly on time for any reason, you can choose to ask your credit card issuer to transfer the credit card into 0% introductory APR card. A mortgage broker in Kew can help you understand the transfer process to a lower-interest credit card.
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Regularly Pay off the Credit Card Balances:
Regularly paying the credit card outstanding dues can shift the credit burden to the lowest amount. Even if you have significant bills to pay on time, try to spend at least the minimum billing amount every month to keep the credit utilisation rate below 30%.
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Don’t Keep More Than One Credit Cards:
Keeping more than one necessary credit card will obviously increase the credit card balances. This will downgrade your creditworthiness and make your credit score very low. Instead, it is best to close all the credit card accounts you are not using to avoid the burden.
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Build an Emergency Fund:
Keep an emergency fund safe and secure to avoid the need for credit cards during emergencies. Aim to save at least 3-6 months of your savings as a part of unexpected expenses.
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Obtain Credit Score Report:
Get a copy of your credit score from major credit reporting agencies. Review it every year to check the account status, credit balances, or any errors. A mortgage broker in Kew can also monitor your report and detect any fraudulent activities.
Final Words
We hope you enjoyed reading this blog. We learnt the impact of credit card dues on home loan applications in many forms. We began by understanding a few things lenders check to see your credibility, how credit card balances impact home loan applications, and steps you can take to improve your chances of getting a home loan.
If you ever find any inconvenience, mortgage brokers from Axton Finance in Kew can establish your creditworthiness and negotiate lower interest rates for your new home loan. Visit their website to have an obligation-free chat with them.
