In this article:
Australians are increasingly relying on credit cards as a way to cover their everyday expenses. If you’ve found yourself in this situation, you need to be wary of the ways that this could be having a negative impact on your ability to get a home loan. That’s because lenders take your total debt commitments into account when assessing your loan application, and unsecured debts like credit cards are seen as a major risk. If you’re struggling with high levels of credit card debt, it’s important to address the issue before applying for a home loan. Otherwise, you could find yourself rejected outright.
Credit Card Debt
Any existing debt commitments can negatively impact any home loan application. This is because lenders assess your loan application based on your income and debt levels.
However, it’s not just about avoiding any debt commitments associated with your credit card. Even if you pay on time repeatedly, the level of your credit card limit can have an impact on how lenders assess your home loan application.
You might have a good routine of paying your credit card off every month. However, a lender will still scrutinise your application, particularly if you have an unnecessarily high limit or multiple credit cards, because the lender will view your credit card limit(s) as a potential debt level for you in the future.
For example, when a lender assesses your monthly expenses, they’ll likely assess your monthly minimum credit card repayment at around 3% per month. Say you have a credit card limit of $5,000, and a long history of spending with that credit card, but you’ve never come close to hitting that limit, a lender will still consider your minimum monthly repayment of that credit card to be about $150. For those who have multiple credit cards, this can quickly add up and you may be shocked at the impact it can have on your loan application.
Find the right loan features for your needs.
What can you do to improve your application?
There are a few options available to you if you’re about to apply for a home loan and worried about the impact your credit cards may have on your application.
- Reduce the limits on your credit cards.
- Cancel any cards that aren’t necessary.
- Ensure your credit card statements reflect the limit changes you’ve made to your credit limits.
- If you’re certain you will be borrowing in the near future, try to avoid committing to any new debts.
- Make sure any credit cards you continue to use are paid on time to avoid a negative credit score.
It’s not all doom and gloom
While owning a credit card might seem like it could hurt your chances of getting a home loan, it can actually help your application in some cases. If you have one credit card in your name, you pay it down regularly and never manage to go near the card limit, then a lender may view that as a positive, as it shows you’re able to responsibly manage debt. Additionally, making regular repayments on your credit card can improve your credit score, which could improve your chances of approval.
It’s best to sit down with your broker and provide them with your financial history, so they can work with you to develop the appropriate strategy and next steps for you. It comes down to putting you in the best position possible to have your home loan application approved.
Our experienced home loan experts can work with you to understand your situation and help you avoid damaging your future home loan applications with a bad credit history. Reach out to our experienced YBR brokers today.