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Should you pay off your credit cards before buying a house?

Alex Ritchie avatar
Alex Ritchie
- 5 min read
Should you pay off your credit cards before buying a house?

Whether your broker has recommended you pay down your debts, or you’re looking to boost your chance of approval, you may be wondering how much your credit cards play into your ability to get a home loan.

It may be worthwhile paying off your credit card debt before buying a house, as this may make your mortgage application look better to a lender, and potentially improve your credit score. However, having a credit card that you use responsibly may boost your chances of approval. 

Credit card debt and mortgage approval

Making late credit card payments, frequently maxing out your credit limit or having multiple debts from more than one credit card may hurt your chances of home loan approval. This is why it may be worthwhile to pay off your credit card debts before you begin the home loan application process.

Lenders look at a few key things around your credit card usage when reviewing your home loan application: your credit report and your expenses. They do so to get a better idea of you as a borrower, including your spending habits and your behaviour around debt.

If you have unpaid or mismanaged credit card debt, a home loan lender will see this, and it could hurt your chances of mortgage approval as it may display a level of poor financial behaviour. 

Consider lowering your credit card limit

Having overdue credit card debt(s) or high credit limits before applying for a home loan may hurt your chance of approval or limit your borrowing capacity. 

Home loan lenders will look at your income and existing expenses to calculate how much you can afford to borrow. Lenders can factor in your maximum credit card limit in your expenses and calculate your borrowing power minus this limit.

Meaning even if you had no outstanding balance, if you have a credit card with a $10,000 limit your lender could assess your borrowing power based on whether you can afford your mortgage with a maxed-out credit card. The lender would calculate your ability to repay a mortgage minus the minimum repayments on a $10,000 credit card balance. 

It may be worth getting on top of your debts and even considering reducing your credit limit in the lead up to the application process. After all, you can always request to increase it again after you gain approval. 

Should I cut up my credit card before applying for a home loan?

While it may seem counterintuitive, cardholders may find that closing a credit card account can hurt their credit score.

Your credit score is one of the most important determining factors of home loan eligibility in Australia. Not only do lenders look more favourably on borrowers with excellent credit scores, but they typically offer them more competitive mortgage rates, waived fees and even cash back deals.

If you can pay off your credit card balance in full each statement period, this may help showcase to lenders that you are a reliable borrower, and may work to your advantage with your home loan application.

Having a credit card you use responsibly should typically not hurt your ability to get a mortgage. As mentioned above, lenders want to see that you are able to handle access to credit responsibly and can make repayments on time. 

How can I pay off my credit card debt?

Have one or more credit card debts hanging over your head? It’s never a bad time to start working on paying them off. But it’s crucial you at least make regular repayments on your debts before applying for a mortgage.

Here are some tips on how you may be able to pay down your credit card debt and improve your chances of home loan approval.

Reduce temptation

If you’re a slave to that piece of plastic in your wallet, cut it up or chuck it in your freezer right now so you no longer will be tempted to add to your debt.

Look at your budget

Take a long hard look at your income, expenses and savings and work out a sensible amount of money you may be able to put on your credit card debt each month. A financial adviser may be able to assist in this process. 

Ensure you’re at least meeting minimum repayments, and then see if you can divert a little more so that you get on top of your debt before interest rates and fees cause it to snowball further.

One debt at a time

If you have more than one credit card debt, consider working off one debt at a time. This may help reduce some financial stress and limit the frustration and pressure of juggling multiple repayments at one time. Not sure which one to choose? Many experts recommend starting with the debt with the highest interest rate first.

Balance transfer offers

Another option you may consider is to transfer your debt to a 0% balance transfer card. These cards are designed to give cardholders much-needed breathing room to pay off their debts. You won’t be charged interest for a set period of time (up to 24 months) and you can use these months to pay down your debt without growing it further.

Debt consolidation loan 

If your credit card is not the only debt you have, i.e. a car loan or a personal loan, you may want to consider if a debt consolidation loan could help your financial situation. This type of loan allows borrowers to roll their existing debts into the one loan, simplifying the amount of bills, as well as reducing account keeping fees and interest costs. 

Working off one loan, typically with a lower rate than the average credit card, may help you get on top of your debt once and for all.

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Product database updated 14 Jul, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.