The beginning of 2018 brought a rise in Aussie credit card debt. The average credit card had $2,000 of debt in April, according to the Sydney Morning Herald, the highest it’s been in two years.
With the country’s housing market uncertain, home buyers may already be anxious. But how much will a credit card balance affect your chances of a home loan? Here’s a look at why you should try to pay off credit card debt first.
Impacts on your credit report
While keeping balances on credit cards doesn’t completely slash your credit score, it looks a lot better to lenders if you’re able to pay off balances regularly. And, if you have high balances, it could negatively impact your overall score.
Because credit scores are considered when lenders are considering your home loan application, it’s best to have these balances paid off so that you’re applying when you will look like the best candidate possible.
Additionally, you could get docked points on your report if you have made late credit card payments. This makes lenders cautious since they won’t want you to make late payments on your home loan. While previous late payments may still impact your report, if you pay off your cards, you’re more likely to be desirable for a home loan.
With comprehensive credit reporting changes in Australia, lenders can see even more information about your credit history than they previously could. You want this information to be positive, showing you are a responsible candidate.
High monthly payments
Another big reason to pay off credit card debt before applying for a home loan is to limit the amount of debt you’re paying back each month. Monthly home loan payments may end up higher than those on your credit card, so managing both can be difficult. And owing on multiple fronts will only complicate things, in addition to creating more opportunities for negative credit report changes.
Remember that applying for a new line of credit, including a new credit card, can impact your credit report. So even if you’ve paid off credit cards before considering a home purchase, try to avoid applying for new cards. Plus, high credit limits can also be red flags to lenders, Your Mortgage says.
For more information about getting a home loan or improving your financial situation, contact our team to arrange an appointment.