That gold or platinum credit card burning a hole in your pocket may be costing you a whole lot more than 22% interest per annum.
The fact is, having high credit card limits and credit card debts can substantially reduce your ability to borrow for your new home, says mortgage broker Trent Bartels, director of www.financeinsydney.com.au.
“Lenders will assess your loan application based on your income and your current debt levels,” he explains. “Having a higher credit card limit could drastically reduce your ability to borrow, because the lenders will take your credit card limit into account when assessing your borrowing capacity.”
Many borrowers are confused about how lenders treat credit card debt, and mistakenly believe that it’s your credit card balance that counts.
“Lenders view you credit limit as a possible debt level in the future, regardless of whether or not you pay your credit card off on a monthly basis,” Bartels clarifies. “So the lenders will look at a credit card limit and assess the minimum payment at either 2%-3% of the total limit.”
For example, if you have a credit card limit of $10,000, most lenders will assume the minimum monthly payment to be between $200 and $300 per month. This applies whether you owe $10,000 or $10 on the credit card account at the time of application.
This may not be a problem if your serviceability is strong, however if your serviceability is tight this could make all the difference between getting your loan approved or declined.
“The key things to consider when taking out a new loan is to keep your credit card limits as low as possible,” Bartels advises.
“If you don’t require your credit card limits to be as high as they are, contact your credit card company and request that they reduce your credit card limits down.”
When you request a credit decrease your provider will send you written notice of the reduction. Make sure you keep a record of this in your files, so you can present to your lender if necessary during your home loan application.
And if you are looking to borrow in the near future – meaning the next six to 12 months – Bartels also suggests that you hold off on applying for any new consumer debts if you can.
“It’s advisable to not take out any further credit facilities such as credit cards, car loans or personal loans as all of these limits will reduce your ability to borrow,” he adds.