How Credit Card Payments Affect Your Home Loans

Most credit cardholders think that owning a credit card will not have any impact on their borrowing capacity as they pay their bills on time. However, this is not true. Did you know that a high credit limit on your card can lower your chances of getting a home loan? Yes, that's true. You may be using your credit card for all the right reasons and could also be a prompt payer but having a credit card can affect your home loan application if you choose to apply for one in the future.

When you apply for a home loan, lenders will first evaluate your profile and check your credit score before approving it. While evaluating your profile, lenders take into account your active line of credit which includes all types of loans and credit cards. Even though you are a prompt payer, if you have a huge credit card debt, lenders will think twice before approving your home loan application.

The Impact Of Credit Card Payments And Home Loans

There are several factors lenders take into account before approving your home loan application such as your repayment capacity, age, credit score, credit history, and your salary. Based on the findings, lenders decide the interest rate and other terms and conditions of the home loan if it is approved. When you have huge credit card bills, it affects your credit score negatively. Generally, home loans are not approved for applicants with low credit score. A high credit card bill affects your home loan in the following ways:

• Interest rate: Applicants with a high credit score can negotiate with the bank and get a low interest rate on their home loan. If you have a low credit score, you will end up paying a high interest rate on your home loan. In most cases, applicants with a low credit score do not have the power to negotiate and agree to the terms and conditions offered by the bank and land up paying a huge amount towards interest. In India, you can get a copy of your credit score for free from the major credit bureaus once a year. So, if you wish to apply for a home loan in the future, please clear your credit card debt and check your credit score after allowing a month. Make sure you have a good credit score when you apply for a home loan.
• Brings down your creditworthiness: What is creditworthiness? When lenders receive a loan application, they evaluate the repayment capacity of the applicant. An applicant’s creditworthiness determines the possibility of him or her defaulting on the loan. In simple words, it is how responsible you look in the eyes of the lender. Credit card debt will affect your credit score and will bring your creditworthiness down. Though you pay your monthly due amount promptly, a huge balance on the card will bring your creditworthiness down. Therefore, before applying for a home loan, try to clear the total balance on your credit card.
• Credit score: Having high debt on your credit card or having multiple credit cards will adversely affect your credit score. Likewise, a high credit limit on your card will decrease your creditworthiness. As credit cards are easily available, millennials get a credit card as soon as they get their first job. However, having multiple credit cards is not advisable as the lenders care more about your future liability than your current credit card balance.

If you want a good deal on your home loan, check your credit score and make some healthy financial changes before applying for a home loan.

Things You Should Know About Credit Card And Its Effect On Home Loans

• Please know that a high credit card limit is not good. As lenders see a high credit limit as future debt that you will be able to take, they can go ahead and reduce your approved loan amount. For example: If you have Rs.1 lakh unused credit limit on your card, your lender might reduce about Rs.2 lakh from your loan amount to make sure you will be able to pay your home loan EMI even if you decide to use your available credit limit on your card.
• Think twice before you apply for multiple credit cards. It is always recommended to have one credit card with features that suit you. Avoid applying for new credit cards at least a year before you apply for a home loan. Remember, every time you apply for a loan or credit card, it is tracked. If the lenders see a lot of applications for credit submitted by you, it could bring your creditworthiness.
• Having active credit cards that you no longer use doesn’t look good either. Most credit cardholders assume that they are not responsible for the credit cards they don’t use. It’s important to understand that available credit limit on multiple credit cards you own is considered before your lender approves your home loan. Closing a credit card that you don’t use might work in your favor provided it does not affect your credit score too much when you reduce your overall available credit limit.
• Pay all your credit card bills on time. Avoid having a huge balance on your credit card. If required, make extra payments apart from your monthly minimum due amount.
• Maintain a good credit utilisation ratio. A credit utilisation ratio is a ratio between your outstanding credit card balance and the available credit limit on your card. Make sure you have a healthy credit utilisation ratio, approximately 40%. Both overusing and underusing your credit card is not advisable.

Things To Do Before You Apply For A Home Loan

• Get in touch with your credit card provider and ask them to decrease your credit limit.
• Retain one credit card and cancel all other cards that you no longer use.
• Pay your outstanding credit card bill.
• Make sure your credit score is high. If your credit score is low, please take healthy financial steps to increase it.
• Consider closing any other existing loans you may have.

Though credit cards can affect your home loan eligibility, there are other factors that you should consider as well such as existing consumer durable loans, phone bills, the average balance in your savings account, and your regular net income. Make sure you take all necessary steps to make yourself look like a good applicant before you submit your home loan application.