Can I get a home loan with unpaid credit card debt?

For many Aussies, credit cards are a significant source of personal debt. Even if people own just one credit card, it can complicate qualifying for a home loan as lenders may consider the entire credit card limit as debt you may need to repay at some point. 

Getting approved for a mortgage depends on establishing that you have sufficient borrowing power, and credit card debt can negatively impact this calculation. Minimising the number of credit cards you own and keeping just one card with a limit that you can reasonably pay in full after each billing cycle may help.

Can I get a mortgage with limited credit card debt?

Having a low level of credit card debt may not impact your home loan significantly. Lenders usually account for the card’s credit limit - and not the outstanding credit card balance - when calculating your liabilities. 

However, proving to a lender that you are in control of debt may help your case. Let’s say you own only one credit card and spend only as much using it as you can pay back in full. This would often be considered responsible debt repayment, which could help you build your credit score. Your home loan lender may then consider you more likely to make timely mortgage repayments. 

If you’re concerned about how credit card debt affects your mortgage qualification, consider using a borrowing power calculator and working out the amount you can reasonably set aside for mortgage repayments each month. The calculator’s estimate is based on the numbers you input as income, household expenditure and debt repayments. However, instead of factoring in what you paid toward your credit card, you should account for a small percentage of your total credit card limit across all credit cards. This is the usual practice adopted by lenders, although the percentage can vary. For instance, UBank estimates your credit card debt at 3.8 per cent of the total credit card limit.

What should I do about credit card debt to ensure mortgage approval?

When you start preparing to apply for a home loan, it is sometimes useful to consider looking at credit cards as well. You may have thought of setting aside a part of your income towards the deposit on your home. However, it may also be wise to pay off any outstanding card debt and reducing the number of cards before building up your savings. Sometimes it can help to cancel only those credit cards with no outstanding debt. Cancelling a card without repaying the balance is considered defaulting or failing to repay the debt and can negatively impact your credit score.

You should confirm that you have no automatic payments going out from your credit card as missed payments could show up in your credit history as negative incidents. When you cancel a credit card, it can be useful to wait for one at least until your home loan is approved and settled. A credit card application, similar to a home loan application, will require a credit check that gets recorded on your credit history. To a lender, it may indicate that you are taking on a lot of debt around the same time. 

If you are struggling to repay credit card debt, you could consider postponing applying for a home loan until you have cleared the card balance. You would be running the risk of getting your home application rejected, which another prospective lender will see on your credit report. For this reason, you could be risking future home loan applications as well.

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