Even if you don’t have any loans or debts, having a credit card might be enough to significantly reduce your borrowing capacity.
The reason why a credit card can be a hindrance to your ability to borrow money, is that lenders assess your credit card on the overall limit, not on how much you currently have in credit card debt.
Even if you’ve never reached your credit card limit since you’ve had the credit card, many lenders will assess a credit card as if it is maxed out. For example, if you have a credit card with a limit of $10,000, the lender is likely to assess your debt based on around 3% of this total amount per month.
This monthly amount, which in this case would be $300, is added to your ongoing expenses, with the result that your overall borrowing capacity is reduced. With a credit card limit of $10,000, that could mean a $75,000 reduction in borrowing capacity, which is significant and can quickly limit the number of potential properties a first home buyer has access to.
Assessing Your Situation
Lenders do not only focus on what your credit card limit will do to your borrowing capacity. They also take other factors into consideration!
One of the most important elements of any debt, in the eyes of a lender, is your track record of making repayments. If you continually miss payments and increase your debt levels, that doesn’t bode well in the eyes of a bank.
Similarly, if you are living off your credit card, and are one pay cheque away from not just missing a payment, but also missing your rent, then that doesn’t make you look overly appealing in their eyes.
It is important to understand that, with the implementation of Comprehensive Credit Reporting (CCR), lenders have incredibly detailed data on your spending habits, drilling down to how early or late you pay off your debts, or other bills.
Credit Cards Are Not All Bad
Now that we understand the impact credit cards have, it’s also important to note, that having a credit card is not necessarily a bad thing in the eyes of a bank.
As mentioned, how you manage your credit cards is far more important than the fact that you have them.
Lenders like to see that you are responsible with money. In fact, if you have a credit card and manage the credit very well, you will be looked upon far more favourably than someone who doesn’t have a credit card at all.
Whether or not you get rid of your credit cards to help you get a home loan really comes down to a few key factors.
- If you have a huge credit card limit that you simply don’t need, it might not be worth it. You could consider reducing the limit to help your application.
- If you have a poor track record of making payments or living off your credit card, it might be worth improving your money management skills.
- If your application is very tight, then your mortgage broker will be the person best suited to help you decide whether you need to get rid of your credit card.
If you’re reliant on your credit cards, take a step back and assess your personal financial and living situation and get that in order before you start the home loan application process.
*This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product. Credit Representative (523208 ) is authorised under Australian Credit Licence (384324).
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