Applying for a mortgage with credit card debt

How will credit card debt affect my mortgage application? 

Your credit card debt can affect the success of your mortgage application, but it’s not the only factor taken into consideration. Each lender uses their own criteria and they work on a case-by-case basis.

A mortgage provider will not only consider whether you have credit card debt, but also the level of your debt, and how well you manage it.

So if you always pay on time and you’re reducing your card balance, then this could give them a more positive impression. In fact, using your card responsibly by maintaining your repayments can help to build up your credit score. 

Be aware though, that they will want proof that you can afford the mortgage repayments on top of your credit card repayments - and all of your other outgoings. Lenders check your affordability, so it seems like your repayments are unmanageable, there’s a strong chance they’ll turn you down for a mortgage. 

I have high credit card debt - what will happen? 

The higher your credit card balance, the higher your monthly minimum repayments and the riskier you may appear to lenders. This could potentially affect your ability to pay your mortgage. But each lender uses their own criteria so they may still offer you a mortgage despite this. 

Some lenders specialise in lending to people with bad credit. Though if you are accepted with a poor credit score, you may face higher interest rates.

So it could be worth shopping around to find the most suitable lender for you. Whichever lender you go for, they will want proof that you can afford to repay the mortgage on top of your credit card. They’ll run affordability tests to compare your debt-to-income ratio (which shows how much of your income is being spent on debt).

Typically, the lower your debt is and the higher your credit score is, the more likely your application will be accepted. 

What else do lenders consider? 

When assessing mortgage applications, lenders take a number of things into consideration, not just your credit card debt. The individual circumstances of each customer are assessed on a case-by-case basis. And each lender uses its own criteria. 

Affordability 

The main thing mortgage providers are concerned about is your affordability - now and in the future. They will look at your employment history and will usually request proof of income (such as wage slips and bank statements) so they can assess all of your incomings and outgoings in detail. 

Lenders need to make sure that you will be comfortable making the repayments so you don’t fall into arrears in the future. They’ll also perform a ‘stress test’ to see if you could still afford the mortgage if your circumstances were to change, or interest rates increase, for example. 

If you were to fall behind with your mortgage repayments, then your home could be repossessed, as a last resort. So, you need to make sure that you only borrow what you can afford to repay. Also bear in mind that the more you borrow and the longer your mortgage term, the more interest you’ll pay in total. 

Outgoings 

They’ll want to know about your spending habits and any other debts you have so they can build up a full picture of your finances. The types of debts and the reason behind them will also be taken into account. For example, a payday loan is usually seen as a red flag by most lenders, but a car loan to help you get to work could be seen as a lower risk. 

Credit history 

Your credit history will also be reviewed to determine if you are a responsible borrower who maintains repayments, based on your previous financial behaviour. Usually, the better your payment history, the higher your credit score and the more likely your application will get accepted. 

Your deposit 

The size of your deposit and the value of the property are other important factors. The higher your income and your deposit, the less you will need to borrow from them, which makes you seem less of a risk. Lenders also take the property itself into consideration, as they want to make sure it’s a good investment and is of sound construction. 

Each lender follows its own guidelines and this list is not exhaustive. 

How can I improve my chances of getting a mortgage?

1. Repay your debt in full 

If you can afford to, try and clear your credit card before making a mortgage application. This will give lenders a good impression that you’re a reliable borrower. It will lower your debt-to-income ratio and credit utilisation rate, which should have a positive impact on your credit score. It will also free up some of your money, and increase your affordability.   

Just bear in mind that if you have a default on your credit file, it will last for 6 years - even if you pay the debt off in full. But it will be updated to ‘satisfied’ when the debt is cleared. The impact on your credit score will decrease over time whether it is paid off or not. 

If you have more than one debt and you’re unsure which one to pay off first, consider which one is costing you the most in interest and charges and focus on that. (But if you are facing legal action then this must be prioritised above other debts). This method of paying off the most expensive debts first is known as ‘avalanching’. Just make sure you maintain the minimum repayments on your other debts at the same time so you aren’t charged any interest or late fees, and your credit file isn’t affected. 

2. Reduce your credit utilisation rate 

If you can’t afford to repay your credit card in full before you make your mortgage application, then try and clear as much as you can afford to (over the minimum). This will reduce your debt-to-credit limit ratio which will boost your credit score. 

Ideally, you want to aim to reduce the amount of debt you are using to within 30% of your credit limit (£300 out of a £1,000 credit limit for example). Your outstanding balance compared to your credit limit is known as your credit utilisation rate. Keeping this low will show lenders that you are a responsible borrower and you are not overly reliant on credit. 

It is also beneficial for your credit score to keep within 30% of your limit, as it can add around 90 points to your credit score. This can increase your chances of getting your mortgage application accepted. Whereas if you are using over 90% of your available credit limit, this could knock around 50 points off your credit score. 

The above percentage encompasses all of your debts in total. So if you have several debts adding up to £5,000 for example, then 30% of the total is £1,500 (0.3 x 5000). In this case, you will want to aim to get your debts down to £1,500 or less. 

3. Think about closing unused credit cards 

There are two ways of thinking about unused cards: 

1. If you keep old cards open but don’t spend the limit, you could lower your utilisation rate, which is positive.
2. But at the same time, you will have a higher overall credit limit available to potentially spend. This could reduce your chances of being accepted, as some lenders may feel uncomfortable about the potential for you max out your credit card and reduce your ability to meet your mortgage repayments 

So aim for a balance, where you consider closing off any old cards that you no longer use. Then keep the outstanding balances on your remaining cards as low as possible. Closing off old accounts also makes you less susceptible to fraud. 

4. Improve your credit score 

To access the best mortgage deals it is important to have a good credit score. You can check your credit score for free with one of the main three credit reference agencies in the UK: Experian, Equifax and TransUnion. You can use your report to identify areas that you need to improve. 

There are many things you can do to boost your score, including making sure all of your bills are paid on time and reducing your debts.

Read our ultimate guide to improve your credit score for the full lowdown. We’ve also put together a 12-week plan to a better credit score, which breaks it down into easy-to-follow steps. 

5. Register to vote 

Before you make a mortgage application, make sure you are on the electoral register as this can improve your credit score by around 50 points. It also allows lenders to check that you are who you say you are and make sure the details on your application are accurate. 

If you are not registered to vote, you can sign up online. It only takes about five minutes and you’ll need your National Insurance number to hand. Check the Government’s website to see if you are eligible. 

6. Maintain your bill repayments

Another important thing you can do to boost your credit score and chances of getting your application accepted is to maintain your bill repayments.

Lenders will check your credit report to see how you’ve managed your finances in the past and use this data to predict your future behaviour. Missing just one payment can knock off around 130 points from your credit score. But if you have a good credit score and a solid history of repaying your bills on time, this will work in your favour.

Ideally, you want to pay your credit card balance off in full each month to avoid all interest and charges. But if this is not possible, you need to pay at least the minimum payment, so that your credit file isn’t affected. Consider setting up a direct debit so you never miss a payment. 

7. Fix any errors on your credit file 

If you check your credit report and find that it is not accurate, you will need to contact the lender to get it updated. Otherwise, incorrect information could impact your credit score and your ability to get a mortgage. 

Make sure that details like your name and address are showing correctly, and dispute any errors (such as credit searches, products or financial associations) that you don’t recognise. Bear in mind that it can take several weeks for errors to be updated, depending on the lender and the credit reference agency, so the sooner you look into this the better. 

8. Remove any old financial ties 

If you’ve ever had a joint financial product with another person, this will show on your credit report. It won’t affect your credit score but it can affect how lenders view you. So if you’re associated with someone who has a poor credit history, it might be better to remove ties with them off your report so it doesn’t reflect badly on you. 

First of all, make sure the joint account has been closed. Then contact the relevant credit reference agencies to request a ‘notice of disassociation’ to remove any ties from your credit report. 

9. Increase your deposit 

The higher your deposit, the lower the amount you’ll need to borrow from the bank. This is known as your ‘loan to value’ (or LTV). Saving a large deposit can boost your chances of getting your mortgage application accepted because the bank is likely to feel more comfortable if you can put a lot of money down upfront (usually over 10% of the value). If the house value was to drop, you would be less likely to go into negative equity with a large deposit behind you. 

10. Don’t make too many credit applications 

Lenders run credit checks every time you make a credit application, which shows on your credit file. So it’s best not to apply for a credit card and mortgage around the same time. 

If you’ve taken out a credit card recently, you might want to wait at least three to six months before applying for a mortgage (this varies depending on the mortgage provider). This is because mortgage providers may feel uncomfortable if you’ve got a lot of unused credit at your disposal, as it could jeopardise your ability to repay your mortgage if you max out your credit. 

Also, a credit application can cause a temporary drop in your credit score. And making a few credit applications within a short space of time, or getting rejected, could give lenders the impression that you are in financial difficulty. This could put them off lending to you, as they don’t want to make your financial situation any worse. 

Can I remortgage with credit card debt? 

Yes - you can remortgage with credit card debt. Remortgaging is when you change your mortgage deal by paying off your current mortgage with a new one. You can stay with your present lender or move to a different one. 

Whether you are applying for a mortgage or a remortgage, lenders will run affordability checks on you, using their own criteria (as mentioned above). Again, the level of debt and the way you manage it will be reviewed. So if you can show that your level of debt is affordable and you maintain your repayments, then lenders should be more likely to view this in a positive light. 

Just bear in mind that if you have a high level of credit card debt, a bad credit history, or you can’t prove that you can afford remortgage repayments then your application is less likely to be accepted. This is because lenders will see you as more of a risk, with the potential for you to fall behind on mortgage repayments. 

If you have enough equity within your property and you can match the lender's affordability criteria, you may also be able to consolidate your debt as part of remortgaging. This will increase the amount you owe against your house, but may be a more affordable option for you. 

My mortgage application was declined - what can I do? 

If your mortgage application was declined, don’t rush into making another application straight away. Multiple applications could show up on your credit file as hard searches which can affect your credit score and your ability to get credit. So take some time to improve your chances before you apply again. 

Try and find out why your application was declined so you can work on improving that area. We also suggest you use our tips above. 

In addition, it may be useful to speak to an independent financial adviser who specialises in mortgages, as they will have a good idea of what different lenders are looking for, and match you up with a better fit.

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