In 2020, it was estimated that over 85% of the UK adult population used some sort of credit, so if you find yourself with some debt lingering on your credit card - you are not the only one. As prices of common household goods increase due to inflation, many of us have been pushed into a corner and found that the need to use credit cards or overdrafts may have been there more often than we would like.
A little credit card debt is usually harmless, however, if you are an aspiring first-time buyer, or even looking to purchase your second home, keeping your debt under control should definitely be at the top of the list of things you need to consider.
Can I get a mortgage with credit card debt?
There is no strict yes or no answer to this question, as your ability to get a mortgage depends on your overall financial situation rather than just your credit card balance. When you apply for a mortgage, you will be expected to meet the lender’s individual affordability criteria in order to prove you are capable of meeting your regular mortgage repayments.
Those with a long history of credit repayments may even find themselves in an advantageous position, as this is one of the best ways to build up a good credit score. Your credit score is a number provided by credit agencies that outlines your trustworthiness as a borrower by summarising how well you have been repaying debt in the past. Therefore those who regularly use their credit cards and quickly repay what they’ve borrowed are likely to have better credit scores and have a higher chance of being accepted for a mortgage.
In the ideal world, those preparing to purchase a property should aim to clear any debt they have - including their credit card debt, where possible. Being debt free will increase your affordability and chances of getting a mortgage, especially when combined with a good credit score. However, this does not mean that those who have some unpaid balance on their credit cards will necessarily be rejected - it all depends on the amount of credit card debt you have.
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How do mortgage lenders view debt?
As we’ve mentioned before, borrowing money from the bank, whether it may be through a loan or by using a credit card, is one of the main ways you can build your credit score, hence why lenders don’t villanize debt as much as many homebuyers might assume.
The problem starts when aspiring homeowners have a poor history of making credit repayments, as this can suggest that they are unreliable as borrowers and have a hard time managing their money. Using your maximum credit allowance or multiple credit cards at the same time also suggests poor money management skills and can reduce your credit score, which in return might make it harder for you to get a mortgage.
A key factor that lenders take into account during the mortgage process is your ‘debt-to-income ratio’ - or how much debt you have in comparison to your monthly income. Each lender will have their own acceptable debt-to-income ratio. However, the rule of thumb is that the lower it is at the time of your mortgage application, the better.
Your debt-to-income ratio, alongside your credit score, will be a key indicator of your creditworthiness to the lender hence why your debt-to-income ratio is one of the key indicators of your risk as a potential borrower.
‘Good credit’ versus ‘bad credit.’
Aside from looking at how much you owe, lenders will look at the ‘spread’ of your credit, meaning the number and types of credit cards or loans you hold. Not all debt is the same. In the eyes of the lender, a loan for a new car would be considerably less alarming than, let’s say, a payday loan.
If paid off regularly, small purchases on your credit card are also unlikely to be seen as problematic by the lender. Using your maximum credit allowance, or ‘maxing out’ your credit card, is an exception, especially if this is combined with other additional forms of credit.
Payday loans and crisis loans are forms of debt that all aspiring homebuyers should aim to avoid, as they will have the most lasting negative impact on your credit profile, alongside missing your credit repayments. A fully repaid payday loan could prevent you from getting a mortgage for at least 12 months, whilst a history of missed credit repayments also significantly reduces your chances of approval for up to a year.
If you want to find out how your debt to income ratio or previous debt history can influence your mortgage application, book a free consultation with one of our award winning brokers.
