Credit cards and home loans: are they friends, or enemies? After all, credit cards are a smart way to build your all-important credit profile for the loan you need. You can even make mortgage repayments using your credit card. But, they also have the potential to limit how much you can borrow.
Here are five questions that can help you get your credit cards ship-shape and ready to pull their weight when you visit your mortgage broker.
1. Is your credit limit too high?
The credit limit is the maximum you can spend on your credit card, and it’s the amount lenders will assume you’ve borrowed regardless of what your statement says.
That’s because the lender knows you could spend the full available amount the very next day. After all, it only takes one trip to Ikea to splurge $8,000 on lounge sets and drawer organisers.
Then there’s the repayment factor. Let’s say you have a $20,000 credit limit. The lender calculates the minimum repayment at the standard rate of 3% of the credit limit, which means your credit limit has now become a $600 ‘expense’ every month, too.
And, that’s not even the whole story!
Lenders also determine the margin between your expenses and your income, and pass it through the 3-year test: you need to be able to pay off the credit limit amount of your card in three years, or you’re deemed high-risk.
For example, for a $20,000 limit you need to have around $7,000 in savings after all your expenses each year ($7,000 x 3 years = $21,000).
To get a magic tick from lenders, reduce your limit to the lowest you possibly can, and stay on top of your repayments to build your credit score without hurting your borrowing power.
2. Are you keeping up with repayments?
If you’re wondering ‘can I get a home loan with my credit card’, you first have to assess your financial situation.
Carrying a debt (called a balance) on your credit card can be expensive when you factor in interest, and doesn’t help your credit score (as much as we might want to believe we’re “showing banks we can handle debt”).
This is especially important if you’re starting to miss repayments. Most credit card providers allow 14 days’ grace if you miss the due date, but after that a default is noted on your credit profile for each month you’re late.
Missed payment defaults stick around for two years, and every lender is going to see it.
You’re much better off spending only what you can afford, using the card for freebies, perks and points, and paying it off at the end of each month before interest kicks in.
You’ll still be showing you’re responsible with credit, and the savings in interest can go towards your deposit instead of years worth of repayments.
3. Are you buried in credit card debt?
If you want to lower your credit limit and pay off your card in full, then you might have to deal with some debt first. That’s ok – there are a couple of options that can help you get on top of it.
- Consolidate your debt into a personal loan. You can move your credit card balance to a personal loan with a lower interest rate, and add any other high-interest debts such as car loans or medical loans to pay one (hopefully smaller) repayment each month.
- Use a balance transfer deal on a new credit card. Many credit cards offer balance transfers, which means you can move your debt from your old credit card (and sometimes a personal loan) to a new card during the application process. Look for cards with introductory offers that waive the interest on the balance transfer for a certain period – some give you up to 36 months to pay off your debt interest-free!
Once your debt is cleared, you can lower the credit limit to satisfy the lenders.
4. Are your annual fees too high?
If you want a loan, you need a margin between your incoming and outgoing money. One easy way to reduce your overall expenses is to look at the costs of bills, subscriptions and ongoing fees.
Almost all credit cards have an annual fee, and some can creep up over $300. These are usually premium cards that earn rewards points and have lots of extra freebies and features. You’ll have to weigh up if you’re offsetting the annual fee by using the features.
For instance, the annual fee might be $295 per year, but you’re only using the card enough to earn $10 off your grocery shopping once a month. The cost is $295 but the value is only $120.
Here’s how to check if your annual fees are too high:
- Spend some time working out how to use the card so you’re earning great points or taking advantage of its freebies. That might mean adding extra cardholders and utilising complimentary insurance for travel, your mobile phone or purchase protection.
- Look for a new credit card with a low annual fee, or none at all. They can be a good option if you’re looking for a way to boost your credit score without ongoing card costs.
5. Do you have too many credit cards?
If you have two Visa credit cards and a Myer store card with a total credit limit of $45,000, you’re adding a whopping $1,350 to your monthly expenses according to lenders.
On top of that, you might be paying hundreds more in annual fees.
Check your cards and see if you can consolidate down to one card with a low credit limit. Look for features you think you’ll use and don’t forget to use a balance transfer to deal with debt from other cards if you need to.
So, can I get a home loan with my credit card?
As long as you keep your expenses in check and are using the best credit card for your lifestyle, the credit card get help you secure a home loan, because it can tell lenders that you’re a dependable candidate for a mortgage.
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