Does Your Credit Card Debt Affect Your Loan Acceptance?
Summary: Credit card debt helps to calculate your credit score. In addition to other requirements, such as debt-to income ratio (DTI), your credit card debt can impact the likelihood of attaining a housing loan in two ways: (1) if payments are on time and the debt is not too taxing, credit card debt may help boost your credit score and increase the likelihood of getting a housing loan. (2) If your monthly balance and payments are too high, credit card debt may limit the amount you can borrow or reduce your chances to buy a house.
Credit card debt helps calculate your credit score. A credit score is a three-digit number that predicts the likelihood of a borrower making on-time payments and repaying a loan—the score typically ranges between 300 to 850.
In addition to other requirements, such as debt-to-income ratio (DTI), your credit card debt can impact the likelihood of receiving a housing loan in two ways:
- If your payments are on time and your debt is not overwhelming, credit card debt may help boost your credit score and increase the likelihood of getting a housing loan.
- The likelihood of receiving a housing loan increases due to credit scores improving.
- Credit scores, one of many important attributes, are consulted for a home loan.
- If your monthly balance and payments are too high, credit card debt may limit the amount you can borrow to buy a house or reduce your chances of being approved for a housing loan.
- Credit card balance affects your debt-to-income ratio (DTI). A high DTI due to credit card debt means the borrower has less disposable income to put towards a mortgage payment—this is seen as risky by mortgage lenders.
- Credit card debt also impacts a borrower’s credit score. If debt is high and payments are inconsistent, credit scores can decrease. A drastic decrease in credit score can lead to rejection or less favorable loan terms (high interest rates).
Your credit card debt impacts certain factors mortgage lenders consider before you can get a mortgage. The following aspects of your housing loan are affected by credit card debt:
- Debt-to-income ratio
- Credit score
- Mortgage interest rate
- Mortgage program eligibility
- Home price
- The range a mortgage lender offers the borrower.
If the debt is managed well, credit card debt can improve credit scores and allow borrowers to receive a more favorable interest rate. However, if credit cards debts bring in high monthly payments, your mortgage application will be affected in three ways:
- Denied for having too much debt and being unable to repay the home mortgage loan.
- Loan amount being reduced.
- Interest rates increase due to credit score being too low.
To strengthen your chances of being approved for a housing loan, here are some tips to help lower credit card debt:
- Utilize 30% or less of your credit limit.
- Consolidate all your credit card balance onto one card with a low interest rate.
- Keep all fully paid-off credit cards open to have a good credit utilization ratio.
- Review your credit report for accuracy and opportunity to make positive changes.
- Pay above your minimum monthly amount to help pay off the debt quicker.
- Make changes to your monthly budget such as cutting expenses to help save and apply the funds towards other debts or to help utilize less than 30% of your credit card balance.
- Make on time payments.
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