All you need to know about the impact of credit cards on your home loan

Disclaimer: This story is for informational purposes only and should not be taken as investment advice.

There is a deep-set relationship between your credit card and a home loan.

“Credit card is a double-sided sword. If you don’t use it wisely you can enter into a debt trap which can cause you a lot of financial trouble,” Balwant Jain, Financial Planner told Zeebiz.

The expert went on to talk of ‘impulsive purchasers’ that at a swipe of a credit card do not realise how this may impact their ‘credit history’ or credit ‘score’.

A credit score measured by Credit Information Bureau India Ltd (CIBIL) is one which is used by banks and financial institutions or any lender to check the creditworthiness of loan applicants or borrowers. “A CIBIL score of 750 and above is considered to be very good,” a report by BankBazaar said.

One of the methods of increasing credit score entails a ‘clean credit card,’ which simply means no outstanding debts among other factors.

“If you have delayed or defaulted on credit card payments or if you have caused the credit card companies to write-off the payments that also spoils your credit score. This makes it difficult for these customers to get a home loan,” Jain added.

“While evaluating a home loan application, banks or lenders, calculate an applicant's borrowing ability based on his/her credit limit. Not just this. Lenders also reject housing loan applications if prospective borrowers have too many credit cards, huge credit card debts, and default payments,” a report by ET said.

Having a higher credit card limit can thus reduce chances of getting a home loan.

“Proper or moderate use of your credit card helps in building a good credit history. Your eligibility for a home loan is decided on this basis. Regular servicing of credit cards gives comfort to banks or to the concerned housing finance companies that the individual is disciplined and pays off all liabilities on time,” Jain said.

Too many credit cards

Having too many credit cards may also reduce chances of getting home loans approved. The report by ET defined ‘too many’ credit cards as having more than five at a time. “The best option is to have 1 credit card and cancel out all other cards at the earliest. Do not apply for new credit cards for at least 1 year before you file your home loan application.”

“Keeping too many credit cards is pointless. You always run the risk and hassle of them getting lost. An individual should have around three to four credit cards but having more than that number can have adverse implications. However this does not necessarily impact your chances of getting a home loan. If there are too many outstanding payments on those cards that will impact home loan eligibility,” Jain said.

“Whatever is the outstanding (payment) on the credit card that will be taken into account by the home loan lender and the institution will deduct that amount from your home loan eligibility. Your final sanctioned home loan amount will be reduced because of this,” Jain said.

Lenders usually assume that you spend around 3% to 5% for monthly payments towards a credit card debt, the ET report added.

“People should use credit cards solely on the basis of their income brackets and how much they are able to pay,” Jain concluded.

Calculate your home loan EMI payments right here. 

Watch the full interview here:

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