How Can Credit Card Limits Affect Your Borrowing Capacity?

How Banks Look at Credit Cards

Reduce your credit card limits

It seems like a no brainer. You are buying a home, so you’ll pay off your credit cards to reduce your debt, but then keep them active so you can buy some furniture or deal with emergencies even when you have a mortgage to pay. Right…Wrong!

When a bank looks at your liabilities it’s obvious that a lender will consider your credit card debts and the monthly repayments on those when you apply for a mortgage. However, what many people do not realise is that credit cards with nothing owing on them can still impact a lender’s assessment of what you can afford to borrow.

Quite often I will sit down with clients and they will tell me that they have a credit card limit of say $10,000 - $20,000 (and sometimes much higher!) and that they pay it off every month so in their mind they’re thinking “why should the bank consider that as it’s always paid off in full every month”. Well  the logic from the bank’s perspective is that there is no stopping you from racking up debt on your credit card to the max. the day after your loan is approved….say, on lovely furniture to fill that new house!

Most lenders take into account three per cent of the total credit card limit, regardless of what the applicant owes so if you had a $10,000 limit but only owe $1000, then the bank will still have to expense your credit card out at $300 a month and for some people that can reduce their borrowing capacity by a considerable amount.

To ensure you can increase your borrowing capacity a good plan is to lower your credit limit or cancel your credit account altogether. End of the day, the larger amount of liabilities you have will lower your ability to borrow the monies you need to purchase that dream property…whether it be in the Northern Beaches or any other part of Sydney

At HORIZON MORTGAGES we’ll sit down with you and work on the best strategy to get you into your next property!