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

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

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Did you find this helpful? Why not share this article?

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

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Learn more about credit cards

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

Does ING increase credit card limits?

You may want to increase your credit card limit for many reasons, such as having access to more spending money. However, if you are using the Orange One credit card issued by ING, you may not be able to do so. 

ING customers can choose a credit limit of their preference when applying for the Orange One credit card. Depending on your financial situation, this limit can be anywhere between $1,000 and $30,000. If you qualify for a Rewards Platinum card, the minimum credit card limit will likely be $6,000. 

Ideally, you should set your credit card limit knowing how much you can afford to repay each month and keep your expenses lower than this level. With most credit cards, you should have the option of requesting a credit card limit increase at a later time, although you will need to qualify for any increase. With an ING credit card, limit increases are out of the question (at the time this was published), which means you may want to apply for a higher credit card limit from the beginning. Remember that you have the option of decreasing your ING credit card limit at a later time.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

How does ANZ increase my credit card limit?

If you’re the primary cardholder on an ANZ credit card, you can increase your credit limit by logging into your credit card account and choosing the “Increase your credit limit” option. You can also submit an ANZ credit card limit increase application form by visiting any ANZ branch or by mail or fax. When completing the form, it's important to remember to specify how much you want the limit increased. You can estimate this by first calculating the amount of credit card debt you can afford to repay based on your income and expenses, and then declaring that in your application. 

Irrespective of whether you’re completing your ANZ credit card limit increase application online or in print, you’ll need to provide updated employment information, income, and expenses, which the company will have to verify. You'll also need to authorise ANZ’s access to your credit history, as your current credit score and recent credit history tell the company about your financial responsibility, and whether or not you'll be able to repay the additional debt you’re applying for. 

In some cases, ANZ may ask you for additional information, or the agent processing the application may reach out to you after your application is received. After verifying your credit score as well as your personal and financial information, however, ANZ may approve a credit card limit increase proportionate to your repaying ability, though it may not be the same as the increase you requested.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How can I increase my Bankwest credit card limit?

When you apply for a Bankwest credit card, you get assigned a pre-set credit limit, which will end up being the most that you can spend on your credit card before having to pay it off. Your credit limit is chosen for you and your current financial situation, and you should remember not to overspend, irrespective of the limit, in order to avoid racking up a massive bill.

However, banks and lenders understand that your needs will change, and have made it possible for you to increase your credit card limit, allowing you to get extra cash when you need it most. Moreover, with a higher spending limit, you may be able to get access to certain perks and benefits with your Bankwest credit card.

To increase your Bankwest credit card limit, you can visit any of the bank’s branches or call 13 17 19 and follow the steps outlined.

How do I apply for a BOQ credit card limit increase?

If you’re an existing BOQ customer, you can request a BOQ credit card limit increase over a phone call. However, you should remember that owning and using a credit card is a matter of financial responsibility, so it might be worth thinking this decision through. 

When requesting a credit card limit increase, you’ll need to be just as responsible in terms of how much you earn and can set aside to repay the outstanding card balance. A credit card company may approve a credit limit increase only if you can show that you have either the income or the disposable income, which is the amount you have left after all expenses have been paid out.

For this purpose, you may need to submit your latest income documents and bank statements for an increase. You may want to estimate how much you usually have left after deducting your expenses, and then use this amount to try and convince the credit card company. Also, you may prefer to pay off the card balance in full each month and thus avoid paying interest on the card, helping you back up any claims of financial responsibility, as well. 

Remember that you may not be able to apply for a credit card limit increase beyond any limitations on the type of card you own. For instance, if you own a card whose ceiling is $10,000, and your current limit is $5,000, you won't likely be able to apply for a $10,000 credit card limit increase.

Can I transfer money from my American Express credit card to my bank account?

If you’re an American Express credit card customer, you may not be able to transfer money from your credit card to your bank account. However, you may be eligible for cash advances, which involves withdrawing money through an ATM. 

To qualify for a cash advance, you’ll likely have to enrol for American Express Membership Rewards. Consider checking your online credit card account to see if you can withdraw a cash advance and, if so, the fees and charges you’ll incur for this transaction. 

You should remember that cash advances are different from balance transfers, which were available with some American Express credit cards earlier. Balance transfers allow customers to consolidate debt from high-interest credit cards to a credit card offering a lower interest rate. If you only recently applied for an American Express credit card, balance transfers may not be available irrespective of the card you own. 

What should I do if my ANZ credit card has expired?

Your ANZ credit card is considered expired only after the last day of the month and year marked on your card. For instance, if your card’s expiry date reads 03/22, it is valid until 31 March 2022 and expires on 1 April 2022. Typically, you should have received a new credit card by that date, and you won’t have to request a new card. 

Once you get the new card, you should remember to switch any automatic payments you have - such as a utility or mobile phone bill - from your expired credit card to your new credit card. Equally, if you are using CardPay Direct to repay your ANZ credit card debt, you may need to update the credit card account details for that service as well. 

In case the new card doesn’t arrive by the expiry date of your current credit card, you can call ANZ on 13 22 73 to find out the reason and if you need to request an expedited card. Please note that if you were planning to close your credit card account or request a credit card upgrade, you may need to call ANZ at least before the 25th of the month your current credit card expires in, as that’s when they may send you the new credit card.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch.