Credit cards can be a good way of paying for something upfront – whether it be a sofa, holiday or car– and repaying it at your convenience.
But as with any form of credit, when you come to apply for a mortgage, whatever you have borrowed in the past six years is closely considered by lenders as they weigh up how risky you are to lend money to.
And actually, in recent years (with the Mortgage Market Review), the mortgage market has undergone a massive overhaul in the way it lends money, with lenders carrying out more detailed checks than ever before.
If you have a poor credit history, you may feel as though it will stand in your way when you apply to new lenders. But actually, the process is there to ensure safe lending for both you and them.
And interestingly, although it might seem counter intuitive, using credit and particularly a credit card can actually swing things in your favour when applying for a mortgage.
“How?” You may ask. Let’s find out.
Working in your favour
Well, if you spend on a credit card and pay it back in full at the end of the month, this shows lenders that you can be trusted with credit.
It highlights that you can borrow in a controlled way and within your means by repaying your debt in full and on time. This is exactly what a mortgage asks – you’ll borrow the money and repay it in affordable amounts each month. No drama, no worries.
In fact, it’s commonplace for mortgage applicants to use a credit card for the sole purpose of building their credit rating, in advance of applying for a mortgage.
However, how this affects your application will, of course, depend also on what other credit you have. For example, if you have always paid back your credit card balance on time but have five loans that are in arrears, these too will be taken into account.
So it’s important that you’ve been equally as responsible with any other borrowing you have too.
When you might struggle…
If you have a credit card and struggle to meet the monthly repayments - maybe you’ve had some late repayment charges or maybe you continually move from one credit card to the next trying to get your debt under control – lenders will see you as high risk.
And it might sound harsh but you can’t blame them. If you can’t meet the monthly repayments on your credit card, why would a lender trust that you can do this on your mortgage? The checks lenders carry out are there to protect you as well as them. If you can’t keep up with your credit card debt, they may decide you’ll also struggle to pay your mortgage.
If you know your credit history isn’t the best and want to apply for a mortgage, you would probably be better spending a few years building it up as lenders look at your finances for the past six years. You can then look to take the plunge and apply for a mortgage.
Applying for a mortgage
It’s hard to know for sure whether you’d be successful when you apply for a mortgage – it depends on many things, including how you have used credit (including credit cards) in the past.
The good news for those who have a credit card is that you will not automatically be penalised for having a card and, as we’ve outlined, it can actually work in your favour – as long as you use it responsibly.
If you’re unsure how your credit history is looking, you can take a look before applying for a mortgage using free services like Noddle and ClearScore.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.