There are 13 million credit cards in circulation in Australia with an average balance of $2,899 per card. Nearly 70% of Australians have a credit card, but how many know how credit cards can affect your loan eligibility?
Why banks review your credit cards?
When applying for a loan, lenders are concerned about your income, expenses and debts. Using this information, they’ll calculate your debt-to-income ratio to determine if you’ll be able to manage your loan repayments.
How banks calculate credit card debt?
But what may come as a surprise is that they’ll actually use your credit card limit—the possible debt you may accrue in the future— not your current balance owing to figure out your monthly credit card expense.
When calculating your monthly credit card expense as part of your home loan application, the lender will generally assume a monthly repayment of about 3% of your card limit.
For example, some banks calculate the amount needed to repay the credit card limit and interest rate charges over a three-year period as part of the home loan assessment process. This helps the lender determine whether you will be able to service the loan and your potential credit card debt.
Therefore, you should take stock of how many credit cards you have and what their credit limits are before beginning your home loan application as they may affect your borrowing capacity.
Take charge of your credit cards
- Avoid applying for multiple credit cards in a short timeframe as this can raise red flags with lenders. If you have multiple credit cards, choose your favourite and then cancel the others.
- Lower your credit limit as much as possible to be a more appealing candidate for a home loan.
- Pay your credit card bill on time to avoid late payments. Set up autopay or direct debit to stay on track. This will demonstrate to the lender that you’re a responsible borrower and it will help with your credit score.