Credit utilisation ratio

halkineso

Hi. Just quick two questions.

Yes I know credit score is meaningless.

1. If i apply for credit cards and get rejected it is important only for 6 months or it can cause some problems for future mortgage application? For example after 2 years.

2. Credit card utilisation ratio is important only for short time or long time? For example I have 0% credit card with 2k limit and spend it all. Repay in full in 24months. This will cause me problems in future mortgage application?

Thank you

concernedSaver

Having the occasional rejection is just a fact of life, lenders won't mind, especially when it comes to a mortgage. Having a lot of rejections, on the other hand, means one's starving for credit. The same goes for your credit ratio: having close to your full credit used means that you won't be able to handle a sudden need. So it's better to keep it under control.

HarlowC

1. Credit searches stay on your report for 12 months and having a lot will decrease your rating in the short term. However, the majority of lenders will be more concerned with a lot recent searches in the past 3 months than say 11 months ago.

2. If you're maxing out a 2k credit card the only way to keep a low ratio is if your have a lot of other available credit (cards, store cards etc). Never exceed a utilisation of 30% as lenders (especially a mortgage lender) will assume you're financially overstretched. 1-9% is ideal, but up to 30% shouldn't be a big problem.

halkineso

HarlowC wrote: »

2. If you're maxing out a 2k credit card the only way to keep a low ratio is if your have a lot of other available credit (cards, store cards etc). Never exceed a utilisation of 30% as lenders (especially a mortgage lender) will assume you're financially overstretched. 1-9% is ideal, but up to 30% shouldn't be a big problem.

I understand that high credit utilisation ratio is bad but is it bad after all? For example all debts paid and you're applying for anything so lender will know that you had high credit utilisation ratio year ago? I hope you got me

jamesd

It's a negative factor if you have the debt at the time you apply. Once you have paid it off or have lower utilisation due to more cards and higher limits it's of less importance.

Also remember that credit/credit ratings/scores/scoring are a tool to be used. If you have a good and appropriate use of the credit it's sensible to actually use it rather than not just to keep the utilisation down.

When applying for a mortgage it's nice to have lower utilisation but it's not essential. I had pretty close to the amount I was asking for in a mortgage in credit card debt when I applied and one of the fussiest lenders around accepted me for an interest only mortgage. That's in part because I was borrowing at a loan to income ratio of only about 1.1 and loan to value of 75% and provided them with a pretty graph showing how rapidly my savings had been increasing and told them what I was using the credit for. They also said they would be happy for me to borrow a similar amount in addition on a mortgage from another lender. You'd have more trouble at higher income multiple/worse affordability and worse LTV. The closer you are to the edge of qualifying, the more it matters.

It's also worth considering use of say a 0% for purchase credit card deal for normal spending if that lets you reduce your mortgage LTV, provided your affordability calculation will support the credit card cost. You can save a lot of money in mortgage interest if this gets you to a lower LTV with cheaper interest rate even though you might in the short term pay a bit of interest if the card deal runs out before you repay or balance transfer it.

halkineso

Before I'll apply for mortgage I'll pay all my credit cards in full which will mean 0% credit utilisation ratio. Also I'll leave 1 year gap without any credit applications. I just want to make sure that credit applications and high credit utilisation ratio older than 1 year won't have impact on application. Thank you