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.

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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. 

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.

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. 

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.

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.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.