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Will credit card debt affect my mortgage application?

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Smart Booster Home Loan

The Smart Booster Home Loan is our low rate home loan which allows you to boost your savings, build your equity and own your own home, sooner.

  • 3.60%
    discount var rate p.a.~
  • 3.96%
    comparison rate p.a.*

When you apply for a mortgage, your lender will assess your ability to service the loan - ie. can you afford to pay the loan back? Part of this assessment will be to look into other loans or debts you have outstanding, like credit cards or personal loans. Here’s what you need to know about credit card debt and your mortgage application.

Why does credit card debt affect your application?

Having a credit card isn’t a bad thing. It can show your lender you know how to manage debt and pay off a loan. But you should be aware of how having and using a credit card can affect your chances of home loan approval in the future.

How do lenders assess credit card debt and your payment history?

When your lender is assessing your home loan application, they will look into your current financial situation. One such thing they have to determine is how much you can borrow or your borrowing power.

Calculate borrowing power

When you have outstanding debts like credit cards, this will impact your borrowing power. That’s because your lender will want to be able to see you can manage a home loan on top of these financial commitments.

When it comes to credit cards, lenders will take into consideration your entire credit card limit rather than your outstanding credit card balance when determining how much you can borrow. This means if you’ve only spent $1,000 on your credit card, but your credit limit is $20,000 - your borrowing power will likely be reduced by the $20,000 limit.

This is because your lender needs to account for the fact you could spend up to this limit. They need to make sure you can afford to service your loan even if your credit card is maxed out.

Your credit card usage can also impact your credit score. A credit score evaluates whether the borrower can afford a loan, and it can also determine their interest rate, and their credit limit. Your lender will look at your credit score when deciding whether or not to lend to you. This means if you are consistently misusing or mismanaging your credit card - this will be reflected in your credit score.

On the flip side, if you have a credit card with a low limit, and you always make your repayments, this will be reflected in a good credit score. The same applies to having multiple credit cards. If you have consistently made your repayments, your credit score should not be impacted. However, it’s important to note that most lenders would prefer to see a thin credit card history, rather than a long one.

What is a good credit score?

A credit score is a number that ranges from 0 to 1000. In general, the higher the score you get, the easier it is for you to qualify for a loan and it may result in a better interest rate.

0- 509 (Below Average)

If you get this score, it means that you are in an unfavourable situation (for example, subject to bankruptcy or court judgment). It is more likely that an adverse event will be recorded in the next 12 months.

510-621 (Average)

Your score is in the bottom 21-40% of the credit active population. This suggests that adverse events will likely to occur for you in the next 12 months.

622-725 (Good)

This score suggests it’s less likely an adverse event will happen that could affect your credit report in the next 12 months.

726-832 (Very good)

Your odds of keeping a clean credit report are two times better than the credit-active population. Adverse events are unlikely to happen in the next 12 months.

833-1200 (Excellent)

You’re in the top 20% of the credit-active population. It is highly unlikely that an adverse event would occur which could harm your credit report in the next 12 months.

What are some steps to manage your credit score with a view to applying for a home loan?

Lenders decide if they will lend money to you based on your credit score. Knowing your credit score and maintaining a good reputation in your credit report can increase the possibility of getting any loans such as home loans, car loans and investment loans. 

If you find yourself in credit card debt, your best course of action would be to pay off this debt as soon as possible.

Consolidating your debt into a single loan can help you manage your finances more effectively.

If you've got yourself into a position where you have multiple loans to pay off at high interest rates, Veda suggests that you can simplify things by consolidating your debt into a single loan. Doing so could help cut the amount of interest you pay while also reducing the amount of admin time necessary to keep track of the repayments. 

If consolidation isn't an option, you may need a different approach. It's usually a good idea to tackle the loan with the highest interest rate first, though this will depend on the size of your debt, late fee penalties and other factors specific to your circumstances.

How to improve your credit score? 

Your credit score can change over time depending on the information contained in your credit report. It’s very important that you manage your finances well. There are some things you can do to make sure your score remains high.

  • Pay your mortgage and other loans on time
  • Pay unpaid credit card debt or loans
  • Limit your credit enquiries
  • Lower your credit card limits
  • Don’t apply for credit you don’t need and can’t pay for
  • Make your monthly repayments on time

What other types of debt can affect your home loan application?

As well as credit debt, there are other debts that will impact your home loan application such as:

  • Personal loans
  • Secured car loans
  • Buy now pay later
  • Other mortgage debt
  • Student loans debt

You can contact the team at loans.com.au to inquire about your eligibility for a loan. Our team of lending specialists are here to assist with the pre-approval process.

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FAQs

Like any other credit application, a personal loan can affect your chance of getting approved for a home loan. When you apply for a personal loan, your application will be reflected on your credit history and credit score. If you have a lower credit score due to multiple credit applications (including personal loans), some lenders may not lend you money for a home loan. Multiple credit apps in a short period of time reduce credit score drastically and indicate to a lender the borrower is in financial distress.

If a variable interest rate is attached to your personal loan, lenders may also add on a buffer to allow for potential interest rate rises in the future.

It is possible to get approved for a home loan with unpaid defaults.

However it depends on the severity of these defaults. If it is a small default under $100-$200, and you can provide reasonable explanation for this default and/or are able to have it resolved - your lender may still consider your loan. This will be different between lenders and it is best to ask your lender for their specific policy or guidelines regarding how they assess unpaid defaults.

Generally, lenders will check bank statement records looking from 2 months back, up to 6 months back. If you are self employed, they may ask for more than 6 months worth of bank statements.

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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