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Credit card debt can affect your loan approval

By Julie Tramonte

September 2023

Picture this: You make a good living, you’ve got money in the bank for a down payment and are ready to take the next adulting step in your life and buy a house. You finally find a house you like in a good neighborhood – and it’s within your budget. You make an offer, and the seller accepts it. (That in itself is incredible!) The house coasts through the inspection and appraisal process, and now you’re waiting for your mortgage to be approved so you can close.  

Waiting and waiting. Still waiting. You start to worry, “What’s taking so long? Is there a problem?”  

Maybe. The underwriters could be concerned with how much credit card debt you have. 

The balance of your credit card may be throwing your approval process off-balance. If so, you’re not alone. 

Credit card debt at an all-time high 

The Federal Reserve Bank of New York reported that consumer credit card debt soared to $1.03 trillion in the second quarter of 2023. I can’t even wrap my head around that number, but I do understand how much $5,733 is: It’s the average credit card balance per consumer, according to Forbes Advisor. 

What does that have to do with getting your loan approved? 

When underwriters review your loan application, they’re evaluating you as a credit risk. They review factors like your finances, credit history and your outstanding debt to assess the likelihood of you being able to repay your mortgage loan. If your debt-to-income ratio (DTI) is higher than 43%, that can have an impact on their decision, besides affecting your credit score.

Higher interest rates aren’t helping

Like higher mortgage interest rates, credit card interest rates have risen. Forbes Advisor reports that the average credit card interest rate is 28.05% as of the week of Sept. 25, 2023. That bears repeating: 28.05%! 

To  better understand why this is so concerning, consider this example provided by Experian.com: If a consumer has a balance of $5,910 on their credit card and makes only the minimum payment of $118 on a card with a 20% APR (less than today’s current rate of 28.05%), they would be charged over $1,000 in interest over 12 months while hardly paying anything on the principal balance.  

These higher interest rates on credit cards make it harder to pay off your credit card debt – and that’s concerning to lenders.  

Start chipping away at your credit card debt

If you’re in the market to buy a house, it’s a good idea to pay down your credit card debt and remove what could be a speed bump in your loan approval process. But even if you aren’t in the market, it still makes financial sense to trim your credit card debt to avoid paying so much money in interest. Plus, you’ll be in a better position when you’re ready to buy a house.

One way to start reducing credit card debt 

According to Money Geek, one way to start reducing your credit card debt is to transfer your balance to a new credit card with a promotional 0% APR period. There may be a fee involved, but not having to pay accumulating interest can save money and help you put a dent in that balance faster – as long as you don’t continue using the card to incur more debt. That’s the hard part.

If you decide to go this route, keep in mind that after the interest-free term ends, the regular interest rate kicks back in, so it’s best to use the 0%-interest time wisely by paying down as much as you can afford before that window closes. After that, you can find other debt-payoff strategies from reputable websites like NerdWallet. 

The bottom line

Responsible use of credit shows lenders that you have the ability to pay back the money you borrow. But the best way to use credit is to pay off your credit card balance in full each month, rather than allowing a balance to carry over and grow. If you have already accumulated some credit card debt, the best way to tackle it is to make a budget and stick to it. Tracking your expenses can help you find places to save and apply those savings toward your debt.

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Julie

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Julie Tramonte is a writer who joined MGIC in 2018. Prior to flying the coop, she wrote for a mattress company, a manufacturer and advertising agencies. She’s obsessed with reading, traveling, tennis and rearranging furniture. Mother of 2 beautiful, adult daughters. Empty nester who recently downsized. Her guilty pleasures are doughnuts and the Kardashians (don’t tell anyone).
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