There is a very good chance you have a credit card. In fact, as of May 2024, it was estimated that credit card debt equated to an average of £2,487 per household and £1,316 per adult. These statistics from The Money Charity may sound alarming to some, especially if their credit card debt is well above these averages. Whilst credit cards can help build your credit score if managed correctly, and help with emergency purchases if you have a lack of readily available cash, they can be seen as a huge blight on your finances due to the high interest rates and ease of access to cash that is not yours. And it is this that makes people concerned about whether they will be able to secure a mortgage while having credit card debt.
Luckily, all is not lost. You can get a mortgage with a credit card but how much you can borrow will depend on your level of debt. Mortgages are offered after stringent affordability checks, so if your debt is pushing you to the financial limit each month, you are less likely to be approved for a mortgage. If you keep your debt manageable, you may not have any issues.
In this blog, we take a look at mortgages and credit card debt and see how it may affect you.
Will I get a mortgage with credit card debt?
You might. It’s long been reported that people with bad credit are unable to secure a mortgage but it’s not true. In fact, having a degree of credit card debt may make you look more favourable to a lender as you’ve been able to build a credit score they can assess. However, that’s not to say you should go on a spending spree on the credit card in the hope of improving your credit rating. The higher the debt, the higher the interest and this makes for a longer time to clear it and a much higher minimum payment. Lenders will see this and be cautious over how much could be lent.
Will credit card debt affect a mortgage application?
Yes. However, how much it affects it will depend on how much you owe on a credit card. Some lenders may see credit card debt as a sign you are struggling to get by on your income and feel uncertain about lending to someone who may service one debt with another and end up getting themselves in financial difficulty. That being said, as we touched upon, if you actively show you can keep your debt controlled, a lender may see you as a responsible borrower and be more inclined to offer the mortgage you hoped for.
How much credit card debt is too much to get a mortgage?
There is no specific figure we could give you as lots of factors are considered by lenders. If, for example, you owe £2,000 on a credit card and earn well enough to cover mortgage payments and credit card payments without difficulty, some lenders will happily approve a mortgage application. Other lenders may see £2,000 on a credit card as significant and opt not to lend.
Each lender has different criteria so it would always be best to speak with a mortgage advisor to discover who is likely to present you with the best option for your circumstances.
A lender will factor in debt-to-income ratio and credit utilisation rate before deciding.
What is debt-to-income ratio?
Debt-to-income ratio plays a large part in a lender making a decision on whether they should grant a loan. Debt-to-income ratio is looking at how much you owe each month against how much you earn.
A credit score will show your history and how well you manage money, but your DTI will show how you manage debt as it is now. This helps give lenders a clear picture of your current situation and affordability.
A lender will add up all debts. This would be your credit card, car finance, any other form of credit and the potential mortgage. They will divide this total by your gross income and multiply it by 100. This then gives a percentage. Each lender may have a different debt to income ratio they are happy to lend against, but it should be taken as a given that the higher the number, the lower the chance of being approved for a mortgage.
What is credit utilisation rate?
The lenders won’t only look at how much debt you have and how much you pay off each month compared to your income, but they will also look at how much of the credit available to you is being used. This is the credit utilisation rate. For example, if you have a credit card with a £5,000 limit and you have £500 on it. You have a credit utilisation rate of 10%. Many lenders want to see you below 30% but this varies per lender and is certainly not set in stone. Don’t be fooled by having multiple credit cards with a zero balance as a way of improving your utilisation rate. This could actually work against you. The potential for debt is considerably higher if you have access to lots more credit.
Can a first-time buyer get a mortgage with credit card debt?
It’s long been known that first-time buyers find getting a foot on the property ladder quite difficult. The high deposit amounts and the potential for a lack of credit score often make it a risk a lender is unwilling to take. Even with a deposit saved and a credit score in place, many lenders put much more stringent checks in place when assessing affordability for a first time buyer mortgage. If you now add in credit card debt too, a lender may feel even more reluctant to offer a mortgage. Ensuring you make prompt payments, preferably above the minimum, is often the best way to appeal to more lenders.
What will a mortgage lender want to know about my credit card debt?
Some people rack up huge credit card bills through reckless spending. Wanting a new pair of shoes one minute, a holiday the next and perhaps a fancy meal out the next. Lenders may see this as overspending. If on the other hand, you spent one lump sum and nothing more, they may see it as an essential purchase that was perhaps unaffordable otherwise.
They will also want to know how you plan to clear it. If you are making the minimum payments, it will take much longer to clear, and if you keep spending on the card in this time, that duration is only going to increase. If you have a realistic plan that sees the debt cleared before you buy the property, or soon after you buy it, you may find a lender willing to take this into account. There is no guarantee of this though and a lender may prefer the debt be reduced or cleared before even considering a mortgage. A credit card debt will certainly not stop you from getting a mortgage, but it may reduce your options, especially if the debt is high and your earnings are low. As with anything financial, it is always advisable to speak to someone with experience and knowledge of the industry. As a fee free mortgage broker can assess your credit card debt situation and carefully guide you through the process of finding a mortgage suitable for your needs and affordability. Whether looking at how to remortgage your house or whether a complex mortgage situation has got you all concerned, our team can help. Contact us today to find out