Most people will owe money on their credit card at some point or another.
If you are looking for a new mortgage then you may worry that carrying credit card debt could put you in a weaker position.
The good news is that credit card debt won’t necessarily stop you from getting a mortgage. But the amount that you owe will influence how much a lender will offer you.
In this article we look at how mortgage lenders assess credit card debt and what you can do to help ensure your mortgage application is approved.
How does credit card debt affect a mortgage?
Credit card debt can affect a mortgage application in a few different ways.
In a nutshell, it can reduce how much you are able to borrow and may put some lenders off completely.
It all comes down to how much credit card debt you have, compared to your income.
If you have acquired multiple cards, with high balances on each one, then lenders are more likely to reduce what they can offer you.
But what you owe does need to be balanced against how much you earn and how you have managed your payments over the last six years.
If you have paid off the balances when you can and kept within the credit limit, then this will positively affect your credit profile.
How do lenders view debt?
Any form of debt, including credit cards, will show on your credit file and be analysed by lenders.
They will want to build up a picture of what debts you have (including the type), how much you owe and how well you make your repayments. It’s not true that any kind of debt will ruin your chances of being approved for a mortgage.
But they will also take into account how much credit is available to you and how much of it you are using on a regular basis. If you are constantly maxing out your limits then this is a sign that your monthly expenditure is not under control, or perhaps you are overstretched financially.
How much credit card debt is too much?
There is no set rule for how much is too much.
A lenders main consideration is that the new loan is affordable for you. So this means the amount owing on your credit card should be compared to your monthly income and other debt payments.
A card balance of £2,000 is quite high for someone who earns £1500 per month, but much less of a burden for an income of £3000 per month.
Here are some things to watch out for:
HIGH DEBT TO INCOME RATIO
This nice bit of jargon means that lenders compare all of your debt payments against your gross monthly income. And then arrive at a debt to income percentage figure.
This is the proportion of your income needed to support debt. If this is too high then some lenders will decline your application.
HIGH CARD BALANCES
If you have maxed out various cards, or continually run them at a high level, then lenders will start to become concerned. It could be a sign that your finances are overstretched and you are relying on short term card debt to get by. If you are regularly using more than 30% of your credit limit then this may reduce the number of lenders available to you.
HAVING LOTS OF CARDS
If you have more than two credit cards then this can affect your chances. But regularly applying for new cards, without cancelling any existing ones, will have a detrimental affect on your credit score.
What about having a high credit limit?
In isolation, having a high credit limit should not be a problem. How you use the card is much more relevant. If you have a credit limit of £10,000 but spend modestly each month, with a balance of less than 30% of your limit, then this should be OK.
If you feel uncomfortable about your credit limit, or it is just unnecessary, you can ask your card provider to lower it.
Can you still get a mortgage with missed payments?
If you have missed some of your credit card payments then these will show on your credit report and will impact on your credit score.
Your credit score is a reflection of how you manage your debts and monthly payments.
With a lower credit score it’s possible that some lenders won’t consider you for a mortgage. But this will depend on the amounts involved and how long ago it occurred.
A mortgage broker will be able to source those lenders who are more flexible and will consider applications with lower credit scores.
Can you remortgage to pay off the debts?
For many people, remortgaging to pay off credit card debts, is a possibility.
This is called debt consolidation and it means you borrow the extra amount needed from the mortgage company. This extra money is then used to repay all of the unsecured debts.
As with all mortgages, the amount you need to borrow will depend on your income and affordability, plus the amount of equity in your home.
It is also possible to consolidate debts when moving home. Again this will be affected by your own finances, but it involves reorganising the equity and cash deposit you are putting towards your new home. You will end up with a bigger mortgage but without the burden of credit card debt.
Does it affect how much you can borrow?
The new lender will be looking at your incomings and outgoings to assess whether or not you can afford the new mortgage.
This calculation will include your credit cards. Because there’s no fixed payment amount, most lenders assume you will be paying 3-5% of the debt amount each month and then factor in this figure.
EXAMPLE:
All of your credit card balances add up to £10,000. The lender will calculate 3% of that debt amount.
£10,000 x 3% = £300
The lender will include £300pm towards your credit cards as part of their affordability assessment.
Lenders also look into your debt-to-income ratio, which will calculate the proportion of income being used to service debts and credit cards.
Although each lender has their own method, having credit card debt does normally reduce the maximum loan available to you..
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
How to improve your chances
We will give some specific tips below, but to give yourself the best chance you should:
Allow time to prepare
Leaving everything to the last moment and rushing to apply for a mortgage won’t do you any favours.
Set some time aside to get all of your paperwork together, get a copy of your credit report, and work out what you owe and to who.
Speak to a broker
Mortgage brokers aren’t there to just pick out a fantastic mortgage deal from over 100 lenders and thousands of different options.
They can also look at your finances and make suggestions so that you have the best possible chance of getting the mortgage you need.
Before you decide on applying for a mortgage you should think about:
Closing unused accounts
If there are credit cards that you just never use then it’s probably a good idea to cancel them and close the account. Having a high credit limit across several cards could make some lenders uncomfortable, as you could get into more debt very quickly.
Reduce credit usage
When you apply for a mortgage the lender will work out your credit utilisation rate. This compares what you owe to your maximum credit limit. Ideally you should aim to keep credit card balances at a maximum of 30% of the available credit limit. The lower the better.
The 30% target figure is an average across all credit cards.
Pay off the cards
Easier said than done, we know.
If you have spare cash then paying off, or reducing, credit card balances will put you in a better position when the time comes to apply for a new mortgage. By doing this you will reduce your monthly expenditure, reduce your debt-to-income (DTI) ratio and lower your credit utilisation rate.
If you have more than one card and you’re unsure which one to pay off first, find out which one has the highest interest rate. And pay off as much of this one as you can.
Avoid applying for credit
Don’t apply for any new credit or loans in the six months before applying for new mortgage. Credit applications will show on your credit file and can cause a temporary reduction in your credit score.
How a broker can help
If you’re concerned that your credit card debts will hurt your chances of getting a mortgage then it’s a good idea to speak to a mortgage broker first.
Don’t apply for a mortgage and then hope for the best! If your application gets refused then it will make getting a mortgage even more difficult.
The safest option is to use a whole of market mortgage broker who specialises in mortgages with credit card debt. They can make suggestions to improve your position and then search over 100 lenders to find the best one for you.
Respect Mortgages can match you to an independent mortgage broker who works right across the UK and has the experience you need.
Call 0330 030 5050 or tap the button below for a free, no-obligation chat.
