Credit cards can be a tricky one when you are applying for a loan.
I have a lot of clients who have a large limit on their credit card however they hardly use the full limit, in fact I’ve had clients who don’t even use their credit card at all, it’s just “in case of emergencies”
Many of my clients were not aware that this credit card can be eating into their borrowing power and here’s why…
When you have a credit card, the Bank or lender will look at the limit to determine what the estimated repayments are on that debt.
Regardless of the balance or how often you may (or may not) use the card they will take the limit and assume you owe that amount.
For example, I had a client this week who had a limit of $10,000.00. He hasn’t used the credit card in over 3 months however the lender assessed the estimated repayments at $350 per month.
This means they are taking $350 from his income to allow for the payment of this credit card before they will assess how much he can borrow.
This meant that his borrowing power dropped $20,000.00 because we had to allow for a debt that didn’t currently exist.
Whilst this can be frustrating it does make sense. This same client could have borrowed the additional $20,000.00 for his purchase and then go on a shopping spree to spend the limit of the credit card which now means he has a higher home loan AND has to some up with the $350 per month to make the minimal payments on the credit card.
There is however, an easy way around this. If you have a credit card that you aren’t using you can either close the card or lower the limit. This will increase your borrowing and make sure you don’t get in trouble down the track.
Should you not be able to lower the limit, then perhaps that’s the right limit for you and you may need to look at borrowing less for your home so you can manage comfortably.
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If you would like to chat one on one with me about your own Home Buying Journey then book an appointment here (appointments can be face to face or via video link)
