Don’t Make These 3 Credit Card Mistakes if You’re Planning to Apply for a Home Loan

Buying a property with a Home Loan is the most significant investment you make in your life. You pay EMIs (Equated Monthly Instalments) for an extended period, sometimes extending up to 30 years. It amounts to nearly half your life. Therefore, it becomes essential to get your priorities right. Defaults in your Home Loan can cost you dearly. Banks can take possession of your house and sell it under the SARFAESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act 2002.

Banks are also cautious while approving loans. They are also taking a gamble because the repayment period extends for almost 30 years. It is challenging to predict what can happen during this period. Therefore, the banks make sure that you have the necessary continuity of income to service yourHome Loan instalments. It explains why they concentrate on your repayment habits when you apply for a Home Loan.

The Credit Score Check

Usually, your first exposure to credit comes through the use of Credit Cards. Banks check your credit history by obtaining your credit report from the credit bureaus. They look at your Credit Card repayment pattern because it can provide a lot of information about your credit behaviour and intentions to repay. Understand the importance of repaying your Credit Card bills. You should avoid these three simple Credit Card mistakes if you are planning to apply for a Home Loan:

1. Defaulting of Your Credit Card Bill

Defaulting on your Credit Card bill payment is the worst thing you can do. What does the default indicate? It indicates your inability to cater to immediate short-term liabilities. Credit Card issuers provide you with the alternative of paying the minimum amount due. Ensure to pay at least the minimum amount due for keeping the card alive.

It not only displays your commitment but also shows your intention to pay. It will be a challenging task to satisfy your Home Loan lender when they question you about the reasons for the default. The simple “I forgot to pay” excuse will never work. The Home Loan processing officer might prefer to play it safe and deny the Home Loan.

Ensure to pay your entire Credit Card bill before the due date. The timely repayment of your Credit Card dues can help you to maintain your credit scores. A high credit score can boost your chances of approval of the Home Loan. It can also allow you to bargain for a better rate of interest.

2. Maintaining a High Credit Utilisation Ratio

The credit utilisation ratio (CUR) is the proportion of the Credit Card bill amount to the Credit Card limits approved by your bank. A high CUR indicates that you are hungry for credit. It can reduce your Home Loan Eligibility. Credit bureaus give a lot of importance to the CUR. A high ratio affects your credit score a great deal. Ideally, your CUR should be around 25% to 30%. You can achieve this ratio is two ways:

a. Pay off your Credit Card bills and bring down the ratio

b. Alternatively, balance your outstanding dues by sharing it with your other Credit Cards.

Your ultimate aim should be to bring it down to acceptable levels. Banks, however, look at the credit utilisation limits in combination with your Credit Card payments. If you have a habit of making the full payments of your card bills, the banks take a comparatively lenient view of the Credit Card utilisation ratio. Under such circumstances, you should consider applying for a new Credit Card and directing some of your expenses towards the new card.

3. Frequent Cash Withdrawals

All Credit Cards come with a cash advance limit of approximately 15% of the total credit limit. However, it does not come free. Whenever you withdraw money from the ATM using the card, you have to pay cash advance fees and interest at the contracted rate from the day of withdrawal up to the time of payment. Hence, it is an expensive affair. Also, frequent withdrawals indicate that you are in a cash crunch. It depicts a wrong picture of your credit behaviour. The credit officer gets the impression that you do not have the liquidity needed to service your Home Loan instalments. Hence, the chances of rejection of your housing loan increase. You should clean up your Credit Card bad habits before you apply for a Home Loan. Be careful of the above three common mistakes and avoid them at any cost to ensure approval of your Home Loan.