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Impact of Credit Cards on Home Loan Eligibility

When it comes to financial needs, a credit card can help you big time. Earning cash back, building credit, and enjoying fraud protection are amongst the various benefits of credit cards. 

However, did you know?

If you have a high credit card limit, it may reduce your chances of getting an approval on your home loan application. Yes, no matter how shocking, it is true. 

During the evaluation of a home loan application, the lenders calculate the borrowing ability of the applicants on the basis of their credit limit. Moreover, the lenders also reject the house loan applications if the potential borrower has a lot of credit cards, default payments, and huge debts

Basically, when you submit the loan application, the lender will go through all your necessary details for checking if you are capable of making the repayments. They will also try to analyze the amount of risk involved in providing you with the loan. 

In order to assess your ability to make repayments, your age, collaterals, credit history, and income are the factors that are taken into consideration. In terms of your credit history, credit cards play a major role. Your credit card plays a major role in maintaining your credit history. In case you have a good credit history, you’ll be counted as a “good risk” and your loan application will be approved. 

This article explains the relationship between home loan eligibility and credit cards along with some essential tips, which will assist you in purchasing your dream house faster. 

Let us first see how a credit card plays an important role in the application process of your home loan. Here is a rundown on the factors that you should consider before applying for a home loan.

Sometimes Too Many can be Too Bad!

In case you have more than five credit cards, it may not prove to be a very good idea. The reason behind this is that a record will be maintained for each credit card you have applied for. Even if you do not use a credit card, it will be added to your overall card limit and reduce the chances of your home loan getting approved. 

The lenders will also add up all credit card limits for ascertaining the amount of risk involved when they lend you the money. The ideal situation, in this case, is to have one credit card and cancel out the rest of the cards as soon as possible. You must not apply for a new credit card in UAE for at least one year before filing your application for a home loan. 

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Higher Card Limits can be a Trouble!

The financial experts claim that a higher credit card limit will prove to be a con. The reason behind this is that from the lender’s end, the credit card limit is what really helps to figure out the debt level, whether the cardholders pay their bills regularly or not. 

As per the lender’s perception, the bill amount of your credit card is an unpaid debt. Hence, before you apply for a house loan, the first and foremost thing to keep in mind is keeping your credit limit as low as it is practically possible. You can simply approach your provider and request for a low credit limit. 

Having a Suitable Credit Utilization Ratio May Help.

Credit Utilization Ratio simply means the ratio between the outstanding balance and the credit limit. The trick, in this case, is maintaining a balance. The ideal ratio is supposed to be 30%. For instance, if your credit limit is AED 50,000, you must be utilizing less than AED 15,000. 

Spending above this amount will have a bad impact on your credit utilization ratio, hence, decreasing your chance to get approval for your home loan. 

Higher the Credit Card Debt, Higher will be the Trouble.

The spending on your credit cards is added up to your card debt every month. It isn’t easy to avoid these spending entirely; however, you can cut down on them. Lenders generally consider that you spend around 3-5% for making payments towards your credit card debt every month. 

For instance, if you hold an outstanding credit card balance of AED 20,000 in one month, you will have to make a payment of 3% of this amount, that is, AED600. Hence, the more the credit card debt, the more payment you will have to make. This will lead to the reduction of the amount you could have paid for your home loan. 

The bottom line is that the usage of your credit card has to play an important role in making the decision whether or not you will be granted the home loan. 

Your bad behavior when it comes to your credit card may end up costing you your dream house. Therefore, next time you should think twice before you mindlessly splurge on your credit card in UAE.  

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