Buy now, pay with your home loan application later? How credit impacts your chances
We're told having credit is good, then we're told having credit is bad: so what's the deal?
There's a lot of confusion around whether having a credit card is good or bad for your home loan application.
Whenever I tell people that credit cards can negatively impact an application, they tend to respond with, "but isn't it good to have some credit?"
So, let's dive into whether that's true.
Mortgage broker Brett Sutton from Two Red Shoes brokerage has seen an increase in the number of people who have had to revise their home loan amounts because of their credit card and buy now pay later (BNPL) commitments.
The rising cost of living over the last few years has led to a reliance on services like BNPL. Finder's Consumer Sentiment Tracker shows that around 31% of those using BNPL believe they wouldn't be able to manage their finances without it.
Even if you are able to manage your finances without the use of BNPL or a credit card, mortgage brokers are still encouraging borrowers to carefully manage their use.
And here's why: "Credit cards and BNPL services can inflate an individual's debt-to-income ratio, a critical factor that lenders consider when assessing mortgage applications," said Brett.
"High levels of unsecured debt can signal to lenders that an applicant might struggle to manage additional financial responsibilities, making them a riskier proposition for a mortgage."
So there's the answer? Credit cards are still a no-no.
Well…. No.
Good credit use vs bad credit use
Brett says: "Some credit card usage is still okay and can even be beneficial when managed responsibly."
Confused? Let's clear that up.
Using a credit card responsibly can be part of "a healthy financial strategy", as long as you can demonstrate to lenders that you can handle credit wisely.
That means maintaining low balances, paying on time, and avoiding new debt in the run up to your home loan application. This way, having a credit card can actually support your application.
When credit cards are not ok is if you have higher balances, if you have multiple accounts, and if you miss repayments.
"The most critical thing right now is being aware of the impacts of late payments on your credit profile," Brett warns.
"Even if you are in conversation with the institution and it's an agreed arrangement, they can and will still report your repayment as late or managed by hardships. Late payments are harshly judged and can stay on your credit report for 2 years."
How to look good to lenders
Brett has 3 key tips for staying on top of your creditworthiness to lenders:
Pay your bills on time: "I make sure to pay all my bills, including credit cards, utilities, and loans, on time. Late payments can really hurt your credit score and signal financial instability to lenders."
Set Up Reminders or Auto-Payments: "To avoid missing due dates and incurring late fees, use your digital calendar reminders or set up automatic payments."
Monitor Your Credit Report: "I regularly check my credit report for any errors and address them promptly to maintain a healthy credit profile."
Keep on top of your credit report by checking your score here.
I need a loan who would you direct me too please
Hi Ryne,
You can review some personal loan options here. You might also be eligible for a no-interest loan through Good Shepherd, worth up to $3,000; more info here.
Hope this helps!