I recently met a young couple who had come to see me to help them sort out their mortgage.
They had been diligently working towards their home ownership dream for several years by saving money for a deposit, keeping their costs low and paying bills on time.
But they had always wrongly believed that by having several credit cards between them, they could build a good credit score for themselves.
And even though they paid off most of the balance each month, they were doing themselves a disservice without even realising it or without really doing anything wrong.
Lenders are wary of credit
Banks aren’t fond of mortgage applicants who have multiple credit cards.
They see it as a massive red flag for a number of reasons.
In their view, you’re sitting on a huge liability that comes with minimum repayments and hefty interest.
Secondly, they make assumptions about how you use your credit to get an idea of what sort of borrower you’re going to be.
Your credit score is determined in a number of ways, but plastic makes up a significant part of it.
Do you go over your credit card limit? That’s a red mark.
Do you miss payments? That’s another one.
Do you swipe it constantly? That’ll also impact your standing.
And recent changes by the financial regulator have made things even trickier.
From February, banks must now be confident that you can repay the entirety of your credit limit, including interest and fees, within a reasonable period.
That reasonable period? Three years.
Would a lender look at your credit liability and believe you could clear it completely within three years?
Even responsible use is problematic
The young couple I mentioned earlier had applied for and received a handful of cards so they could build their credit history.
They didn’t use them frivolously, but they paid bills and rent on them so they could collect points.
Then, at the end of the month when the statement arrived, they paid it all off, in most cases.
But each card had a generous credit limit, so the total amount they could spend was very high.
And that’s what banks look at – not how much you’ve spent.
Let’s say you have one or two credit cards with a total limit of $20,000, your lender will assume this is an expense.
They will estimate your monthly repayments based on between three and four per cent of your total credit card limit.
The more cards you have, the higher this expense amount will be.
And the higher the expense, the lower your potential borrowing power.
How to be attractive
Mortgage brokers help you find the best deal and the most essential features of a home loan.
But if you have a problematic credit history, even an experienced and qualified finance advisor may have to battle to get you across the line.
The key is to be responsible with your debt.
This is what banks want to see to be able to ensure they’re lending to a good candidate.
Pay your bills on time and in full, if you can.
Don’t miss repayments and don’t pay just the minimum amount.
And never go over your credit limit.
Even one exceeded limit and a single missed bill can derail your mortgage hopes.
Lower your credit limit as much and as low as possible.
The higher your limit, the more your liability in the bank’s eyes.
Plus get rid of excess cards so you’re not seen as a risk.
Using your credit card will help build your good credit score, but don’t overuse it.
Banks look at something called a credit utilisation ratio, so the more you swipe, the worse it will be and the more nervous they might feel.
If you don’t pay your balance in full – a lot of credit card holders don’t – then start immediately focusing on whacking that debt as much as you can.