Should I pay my credit card before applying for a mortgage

Should I Pay Off My Credit Card Before Applying For A Mortgage?


Generally, it is a good idea to pay off your credit card debt whenever you can. 

Reducing credit card debt can improve your credit score, which may be helpful when applying for a mortgage. Plus, you’re not paying off lots of accumulated interest. 

Ultimately, a higher credit rating could result in a lower interest rate offered by your mortgage lender.

What Is Credit Risk?

Credit risk relates to the potential loss to a bank when a borrower defaults on a mortgage or any other loan type. It is the risk that you, as the borrower, will not make the agreed repayments set out in the original loan agreement.

There are several factors that lenders take into consideration when assessing if you are likely to fall into arrears with your monthly payments:

  1. Are you creditworthy? - Lenders will consider your credit score, employment stability, income, current outgoings, and ability to make the proposed repayments.

  2. Economic factors—Inflation, unemployment statistics, interest rates, and general economic stability can affect any borrower's ability to maintain payments.

  3. Market conditions - seasonal businesses could face higher credit risk during economic turndowns.

  4. Security - property taken as security could reduce credit risk, with lenders being able to recover monies in the event of default.

Credit risk management involves establishing lending criteria, creating risk-priced products, and diversifying loan types/products.

Does Credit Card Debt Affect My Credit Score?

Your credit score indicates to lenders how well you manage your finances. 

Credit reference agencies calculate your credit score differently, which helps them decide whether you are creditworthy and what interest rate they will offer you. It is always recommended that you stay within your credit limit.

Making payments on or before their due dates can improve your score. In addition, to ensure a good credit score, you shouldn’t spend up to the agreed maximum limit. If you only make the minimum monthly repayments when you’ve maxed out your credit card limit, it could indicate that you are struggling to keep up with your finances, potentially impacting your credit score.

It’s recommended that you try to keep the credit you owe on all credit card balances below 25% of the total limit. The lower the amount owed on credit cards, the better.

The longer you’ve held your credit cards, the more they help your credit score. 

If you can’t make the minimum credit card payments and generally find managing credit difficult, contact your lenders quickly to discuss any options. They may be able to offer a payment plan where your payments are reduced for a period.

A late payment can result in extra fees and damage to your credit file, leading to higher interest rates in the future.


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Can I Apply For A New Credit Card If I Apply For A Mortgage?

Getting a new credit card can have a short-term detrimental effect on your credit score, which may mean that you cannot get the mortgage you want, or if you can, the interest rate may be higher.

One part of your credit score is worked out by the length of time of your credit history and the average age of the accounts you hold. A new credit card will reduce the average age of your credit cards and could lower your credit score.

In addition, if you start applying for several credit cards, they will appear as “hard searches,” reducing your credit score. Lenders should only carry out a soft credit check until you apply formally for a credit card or loan.

If you are simultaneously applying for a new credit card and mortgage, you may need to be confident that you can afford all your repayments. Conducting an income and outgoings assessment is good practice to ensure you can afford the proposed mortgage repayments and all other credit you hold.

Remember, you must keep up mortgage repayments, as your home is at risk if you miss them.

If you're uncertain and think you may have a bad credit score, you can always check with a credit reference agency before you apply for credit. You can apply online for a small fee and see your credit reports instantly. Importantly, this will not negatively impact your credit score.

What Is A DTI?

DTI stands for debt-to-income ratio.

It’s one of the many methods lenders use when deciding whether or not to grant a mortgage.

To work out the DTI, divide the total monthly debt payments by the gross monthly income and multiply the result by 100.

The following are considered to be debt items when assessing the DTI:

  • The monthly mortgage repayment you will be paying once the mortgage has been completed.

  • Your monthly credit card repayments.

  • Any monthly hire purchase or lease repayments on any vehicles you own.

  • Any monthly repayments on personal loans.

  • Any monthly sum you are paying, perhaps for your children.

For a DTI calculation, the following don’t count as debt: utility bills, council tax, mobile phone contracts, subscriptions such as Netflix, Prime, etc.

A DTI example - if your monthly debts = £1250 per month and your gross monthly income = £3000, the DTI = £1250 divided by £3000 x 100 = 41.7%.

The lower the DTI ratio, the less risk you pose to lenders.

Some people think that a credit score is similar to a debt-to-income ratio. However, they are quite different, and you may have a strong credit score and a high DTI or a low credit score and a low DTI. 

A credit score reflects how you manage your finances and confirms whether payments were made when they should have been. It also takes into account any defaults or county court judgments against you.

A debt-to-income ratio is the proportion of income you spend on paying off your existing debts, such as mortgage payments, personal loans, credit cards, and car finance. 

Experian credit reference agency suggests you should keep your DTI below 43%

For more information about credit card debt and applying for a mortgage or second mortgage, contact our expert team today. 

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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