In the last edition of our newsletter, we looked at how living expenses can affect a client’s borrowing power. This time around we’re looking at credit cards and, more importantly, the impact they have on your capacity to borrow.

Why Credit Cards Affect Borrowing Power

Owning a credit card can have a real effect on a person’s borrowing power. And it is not just about how much you owe, either.

When applying for a home loan, lenders look at your credit history as a way of determining your ability to service that loan. In doing this, they assess your credit card debt based on your cards’ limits, not their balance. They use the sum of what your total monthly repayments would be if you maxed out every card. So, the more credit cards you have, the higher your total limits.

How You Can Improve Your Borrowing Power

There are several things you can do to improve your borrowing power when you have a credit card:

  1. Cancel cards and consolidate debt – If you have unused credit cards, consider cancelling them. Then, consolidate your credit card debt onto one card.
  2. Pay the debt down – Next, devise a strict strategy aimed at making extra repayments to reduce your debt. Your financial adviser can help you with this.
  3. Reduce limits – If you do have a credit card, reduce its limit to the lowest amount that is practical for your individual circumstances. Lenders will consider this a reduction in monthly outgoings and may increase the amount you can borrow.
  4. Pay it off each month – Ensure your credit card debt is paid, in full and on time, each month. Lenders see this as a good indicator of someone who can manage mortgage repayments. Conversely, an overdue payment of as little as five days can adversely affect your loan application.
  5. Do your homework – It is always a good idea to do some research and look at the different types of credit cards available. Comparing interest rates, fees and choosing a card with an interest-free period can save you money and enable you to reduce the debt even quicker.

Having a credit card is not necessarily a bad thing. In fact, when used well, a credit card can be a convenient and practical payment tool. To minimise the effect your credit card has on borrowing power, or to compare terms across different cards contact me on (02) 9908 9888.

Patricia Williams is a credited representative (CRN 400458) of BLSSA Pty Ltd (Australian Credit License No. 391237).