The home loan is the biggest liability one takes in his/her lifetime. Getting it right is a must as it helps you in achieving your dream of owning your house with minimal trouble. Borrowing money is a big task and the first exposure to credit for many comes through the use of credit cards. Here are three mistakes associated with credit card usage that you must avoid if you intend to apply for a home loan.
Defaulting on your credit card bill
This could be the worst possible thing that can happen to you. If you default paying the credit card bill, it will show that you do not have money to even service your short-term liabilities. When you are going to apply for a large loan such as home loan even a ‘I simply forgot to pay’ can cost you dear. The credit officer may simply choose to play safe and deny you home loan.
“Do pay your entire bill outstanding before the due date,” says Sukanya Kumar, founder and CEO of RetailLending.com. Timely payment of your credit card bills and other loans also boost your credit score, popularly known as CIBIL Score. A high credit score fetches you better terms of housing loan. A low credit score may deny you a home loan or may make you borrow at a high rate of interest.
High credit utilisation ratio
“A high credit utilisation ratio indicates credit hungry behaviour. Also, high usage of credit card limit reduces your home loan eligibility,” says Ranjit Punja, co-founder and CEO of CreditMantri. Credit utilisation ratio is arrived at by dividing the credit outstanding by the credit limit. A number in excess of 30 percent is seen as high usage of credit.
Sustained high credit utilisation ratio is pursued as need for credit even to meet daily expenses. It also affects your credit score. “When you intend to go for a home loan, try to cut down your credit card outstanding and other loans. It will improve your eligibility for the home loan,” says Ranjit Punja.
This could be the worst possible thing you can do while using a credit card. Cash withdrawal on a credit card is the costliest resort to raise cash. “If you have withdrawn cash using a credit card, then the credit officer of the bank may deduce that you are going through a massive cash crunch,” says Sukanya Kumar. Your home loan may be denied.
Cash withdrawal on credit cards attract one-time charge. The interest calculation begins from the date of withdrawal. This is a double whammy and should be avoided at any cost.
You should be utmost prudent while using your credit cards and repaying other loans for many months before you apply for home loan.