Fantastic plastic can help you purchase things in the short term that you may not be able to afford otherwise, but your credit card debt could actually get in the way of your home ownership dreams.
If you were to walk down the street and canvas the people who pass by, you’d be hard pressed finding someone who doesn’t have at least one credit card.
In fact, most of us have two or three visas and mastercards and on the go at any one time, with varying credit limits and balances.
The Reserve Bank estimates that we each hold around $3,250 in credit card debt, but for some people this figure is much higher. Brett, 37, admits that his credit card debt spiralled out of control over a number of years, eventually reaching $100,000 across seven cards. He was forced to refinance his home loan to include his credit card debt, meaning he’ll be paying off those credit card purchases for another 25 years!
Brett was actually lucky that a bank was willing to consolidate his loans: these days, credit card debt can have a serious impact on your borrowing power, as high levels of unsecured personal debt is often the reason why home loan applicants are declined for a mortgage.
A credit card debt of just $5,000 can have the impact of reducing your mortgage borrowing power by up to $25,000. Say you and your partner have four credit cards between you, with a combined credit limit of $15,000: if you were to apply for a home loan together, your borrowing power would be reduced by up to $75,000. (Check your mortgage borrowing power here).
So what does this mean for you as a would-be homeowner? It means that before you buy your own property – whether it’s to live in yourself, or as an investment – you need to get your personal debts in order.
Firstly, reduce your credit card limits down to the bare minimum. The banks pay attention to your overall credit limits, not your balance.
So, if you have a credit card with a limit of $2,500 and a balance of $1,120, call your bank right now and reduce the limit down to $1,200. You don’t necessarily need to maintain credit limits in $500 blocks, so ask your bank to reduce your limit to an amount that suits you.
By doing this you will not only put a lid on your temptation to charge frivolous extra expenses to your card, but you’ll also put yourself in a better position to get a loan when it comes time to apply for a mortgage.
Next, work on eradicating your personal debts as quickly as possible. Make sure you pay more than the minimum each month and if you have more than one credit card, try and focus on one card at a time to eliminate each debt. This will help to demonstrate to lenders that you’re responsible with money, which will only serve to help you when you’re shopping for a mortgage!