My credit cards aren’t a problem because I wipe them every month, right?
There is a common misconception amongst borrowers that if you pay off your credit card every month, it won’t impact on your application for a property loan. While some lenders may ignore credit cards that have been paid off in full for three months in a row, the reality is that most won’t.
The way most lenders treat credit cards when assessing a person’s liabilities for a loan application is to assume that the credit cards are fully drawn to their limit. Sound absurd? Perhaps a little, but the reason is understandable. Credit cards are a quick and easy source of unsecured credit. With one simple swipe, the bower can accumulate a lot of high-interest debt, which would affect his or her ability to repay other loans.
Even if a borrower doesn’t use a particular credit card, the card’s limit – not its balance – will be taken into account, most likely reducing the person’s borrowing capacity. It’s seen as a liability that the person may have in the future whether it is used or not. How much of a liability? Lenders can count as much as 60 per cent of the credit card limit as a yearly repayment. So, it’s easy to see how a credit card with a large limit can dramatically reduce someone’s borrowing capacity. Every $1,000 of credit limit can reduce a person’s borrowing capacity by $5,000. A limit of $50,000 can reduce borrowing capacity by $250,000!
Credit cards can’t be “hidden” from lenders as they appear on your credit reference, so having numerous credit cards can cause a lot of problems when it comes to getting a home or investment loan. Ironically, some people believe having many cards means you are a good borrower with low risk. But generally speaking, lenders don’t like to see too many credit cards, as it implies a lifestyle supported by credit.
What can you do to maximise your borrowing capacity? Speak to your Finance Broker before applying for your loan. They will be able to advise you on your credit card limits and how they will affect your borrowing capacity. This will give you time to adjust your limits if required.