If you’re hoping to apply for a mortgage in the near future and have credit card debt, it can be understandably worrying to wonder whether this will affect your application. Having credit card debt doesn’t have to stop you from buying a new home, although knowing how lenders will view this debt can help you know how to improve your eligibility.
In this post, I’ll run through whether you should pay off your credit card debt before you apply for a mortgage as well as how lenders view this type of debt.
Should I Pay Off My Credit Card Debt Before Applying for a Mortgage?
Ideally yes you should pay off any credit card debt if you can afford to do so. This will help many factors that are reviewed by the lender when they are determining your eligibility for a mortgage, including your affordability, debt to income ratio, and credit score.
Obviously paying off all of your credit card debt before applying for your mortgage may not be possible, although even paying off even a small amount will help. Below I’ll run through exactly why credit card debt affects your application and what you can do even if you can’t clear the full debt.
Why Does Credit Card Debt Affect a Mortgage Application?
Just having credit card debt won’t necessarily stop you from securing a mortgage on a new home. It all depends on whether the credit card debt will negatively affect you in other ways that could be seen as a red flag by the lender. Here are some of the ways credit card debt can affect your chances as a borrower.
Increases Your Debt to Income Ratio (DTI)
Your debt to income ratio (DTI) is an important metric that lenders use to assess your eligibility for a mortgage. The higher your debt to income ratio, the higher risk you seem in the eyes of the lender so the higher likelihood your application will be denied.
When you pay off all or some of your credit card debt, this ratio is reduced.
Impact of Credit Card Debt on Your Credit Score
As long as you pay off the minimum amount required by your credit card provider every month you won’t generate any missed payments. If you have any missed payments that can significantly impact your credit score and raise red flags to the mortgage provider.
Credit bureaus also look at your credit utilisation which can negatively impact your score if it’s high. Having a credit utilisation below 30% is recommended and if it can be below 10% then that’s ideal.
As a working example, credit utilisation is the amount of your credit you use in any given month. For example, if you have a £5,000 credit limit on your credit card and spend £1,500, your credit utilisation is 30%.
Debt Repayments Reduces Your Monthly Affordability
When a lender reviews whether you’ll be able to afford the monthly mortgage repayments they have a look at how you are spending your money. If you have a sizeable credit card repayment bill every month, that reduces your disposable income.
When they perform stress tests on the mortgage repayments, for example increasing the interest rate or increasing your monthly expenses, with additional debt expenses it may raise red flags and mean you don’t pass their affordability checks and won’t qualify for a mortgage.
Getting a mortgage with Credit Card Debt
If you aren’t able to pay off all your credit card debt before applying for a mortgage, don’t worry it’s still possible to get a mortgage. Having credit card debt can affect your mortgage application, however, if you can demonstrate that the monthly repayments are manageable and you can still comfortably afford the mortgage repayments it may not make much impact.
How much debt the lender is willing to accept will be on a case-by-case basis depending on a number of factors. As a general rule, the lower your debt to income ratio, that is the amount of debt you have in relation to your income, the better.
If you are worried about whether you’ll be accepted with your current level of debt, make sure to speak to a mortgage advisor that may be able to help you find a specific lender and give you all your options. This post I’ve written on what to ask a mortgage advisor might also be helpful.
Is It Ever Worth Not Paying Off My Credit Card Debt?
In most situations paying off your credit card debt is most likely the best option as it improves your eligibility for a mortgage and saves you from paying a high-interest rate on the debt.
The main scenario where it makes sense to not pay off your credit card debt is when you only have the minimum deposit required to secure a mortgage. For example, if you need a certain deposit, usually at least 5% of the property price in order to secure a mortgage, and you only have this amount in savings, then you need to keep that money to put towards the house deposit instead of paying off your credit card debt.
Remember you’ll also need to keep money aside for other expenses like stamp duty, mortgage advisor fees, and mortgage application fees.
Is It Bad To Have a Lot of Credit Cards When Buying a House?
No, it isn’t necessarily a bad thing to have a lot of credit cards when applying for a mortgage, what matters is how you use them. If you pay them off every month and spend within your means, having multiple credit cards can actually improve your creditworthiness.
Lenders look at your credit score as one way to judge eligibility for a mortgage. If you have a lot of credit cards and pay them off every month, you’re building up a lot of good credit history which will improve your credit score.
However, if you have a lot of credit cards and don’t pay off the balance each month so you’re accruing debt and possibly even having missed payments, that can significantly negatively affect your mortgage application.
Is It Bad To Get a New Credit Card Before Applying for a Mortgage?
When you open a new credit card that can impact your credit score as the provider usually performs a hard credit search to approve your application. If you were to open more than two in a year that could negatively impact your mortgage application, although as long as your credit report is in good standing it probably shouldn’t be much of an issue.
The main issue about getting a new credit card is whether that will change your spending habits. If you’re expecting to spend exactly the same but just on a different credit card, then that should have minimal if any impact.
Should I Close My Credit Card Before Applying for a Mortgage?
No, you shouldn’t close your credit card before applying for a mortgage. Credit history makes up a significant portion of your credit score, and having a credit card that you successfully pay off every month will help your credit score which also helps your mortgage application.
Impact of Other Types of Debt
Other types of debt are treated in a similar way as credit card debt. The main factor is how much the debt will affect your ability to repay your mortgage or if the debt increases your debt to income ratio to over the level deemed too risky by the lender.
The other debt can come in a variety of forms including personal loans, car finance, and payment plans.
Summary – Should You Pay Off Your Credit Card Debt?
Overall, if you can pay off your credit card debt before you buy a home it can improve your chances of securing a mortgage and being eligible for better mortgage products. Even if you can’t pay off all of your debt, any contribution you can make will help as it should reduce your monthly repayments as well as reduce the amount of money you are borrowing at often very high-interest rates.
If you have any questions relating to paying off debt or mortgages make sure to contact a financial advisor or mortgage advisor that can give you advice related to your specific situation. If you’re having problems paying off debt there are a number of avenues you can turn to such as the National Debtline in the UK that gives free, confidential, and independent advice. There are similar helplines and charities all across the world if you don’t live in the UK.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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