Holding many credit cards? Will it affect your future home loan?

Sukanya KumarRetailLending.com“Use credit card limits wisely, pay your minimum due amount on time every month to the issuing-bank, the more you use the cards, your credit score goes higher! Nobody gives a home loan to a person who has no credit history.....”Aakash was listening to his colleague Nishant talking to his group in the cafeteria. Nishant is of his age only, about 27 years and has recently got promoted. Everyone looks up to him!Nishant is planning to take a home loan and recently read about credit score and how much it matters while borrowing.Aakash has only two credit cards. First he hardly uses and the other only during emergency. So, he was wondering whether he will ever get a home loan if what Nishant was saying is true!In reality, things are a bit different than what we perceive. Having a few credit cards are common. One for your corporate spends, one for issuing add-on card to your teenagers and wife where you can set a limit for them, one for your emergency spends. This is a standard situation and in most cases it is sufficient too.But every other PSU, private and MNC banks have multiple credit cards and they do hard-selling of these plastics starting from the graduate colleges till the retirement age of a person! And why not? People buy it too. Who doesn't love credit? Every online and offline store mega-sale has cash-back offers associated with one or two banks, flying miles with another. Higher points to redeem in some cards, some have special discounts even on fuel buying! For every need, there's one card. And human beings have endless needs.Coming back to the point, what will happen to Nishant in reality when he applies for a home loan while he holds almost 12 banks’ credit cards? His income is more than sufficient for the home loan amount he requires, he has never defaulted on a single minimum-payment to the banks from where he holds these 12 cards, banks have been happily increasing his credit limit each year and he has a fantastic 800 plus credit score that he can boast about! His total credit limit is more than his annual package!Here it is. The banks will add up all the amounts that Nishant has utilised and consider 5% of it as his current liability. This can be best understood with the help of an example. Nishant has 12 cards and he has a credit limit of Rs 1 lakh on each of these cards. For the sake of simplicity, let us assume that he spends Rs 50000 on each of these 12 cards. His credit card spending for the month is Rs 6 lakh. The bank calculates his current liability as the minimum amount due, that is 5% of the monthly outstanding. In this example it works out to Rs 30000 (5% of Rs 6 lakh).Bank will reduce Nishant’s monthly income by Rs 30000 while computing his loan repayment capacity. If Nishant’s monthly net take home income is Rs 1.5 lakh and there are no other loans outstanding against his name, the bank would have offered him a loan of Rs 1.1 crore. But with this current liability of Rs 30000 (on credit card outstanding of Rs 6 lakh) the bank will offer him a home loan of Rs 80 Lakh. Just because Nishant used his credit card too much, his borrowing capacity went down by Rs 30 lakh.Please do not over-leverage your card-holding just because you feel that it will boost your credit score and make you more credit-worthy. Ultimately credit score is only an indicator and the actual home loan eligibility calculation is mathematics of debt to income (DIR) ratio.Happy Credit, Happy Mortgage!!