Getting your finances in order before you apply for a home loan is a crucial step in the application process.
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.
Here is everything you need to know about paying off credit cards before getting a home loan.
Can a credit card debt hurt my chances of mortgage approval?
Using your credit card responsibly may not impact your chances of mortgage approval or your credit score. But making late payments, maxing out your credit limit or having multiple debts from more than one credit card might.
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 may hurt your chances of mortgage approval.
Further, when assessing your borrowing power, lenders will look at your credit card limit. A lender may factor in your maximum limit in your expenses and calculate your borrowing power minus this limit. Meaning, if you have a credit card with a $10,000 limit, even if you had no outstanding balance, your lender could view this as a debt you already have and calculate your ability to repay a mortgage minus the minimum repayments on a $10,000 credit card balance.
This means that having mismanaged 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. It may be worth getting on top of your debts and even considering reducing your credit limit for the application process.
Should I cut up my credit card before applying for a mortgage?
While it may seem counterintuitive, many cardholders have actually found 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.
Just because you have a credit card doesn’t mean this will 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. 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.
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 handy 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, as your debt will grow much faster with a higher rate.
- Balance transfer offers. Another option you may consider is to transfer your outstanding credit card debt to a zero per cent 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.