You’re all set to apply for a home loan but you still have a hefty credit card debt. So you figure you’ll pay it all off and just keep the card for emergencies. Surely the bank will be impressed with your debt-free status, right? Wrong.
The bank’s view on credit cards
Banks look at credit cards through a single lens – as debt. Having a huge credit card debt is definitely a no-no, but what matters more is your credit limit.
Why? Because from the bank’s perspective, a high credit limit means a high debt risk. After all, what’s stopping you from maxing out your credit card the day after your loan is approved? Maybe on new items for the new house you purchased!
How your credit card limit affects the amount you can borrow
Regardless of how much you owe on your credit card, the bank needs to account for 3% of your credit card limit when assessing your home loan application. As an example, if you have a $10,000 credit card limit, 3% (or $300) is what you have to pay each month at minimum.
Even if you never spend a cent on your card, a high credit card limit will negatively affect your loan serviceability (whether the bank thinks you can afford repayments after income and expenses are taken into account).
So not only do you need to pay off your credit card debt, but you should also reduce your credit card limit. Or better yet, cancel it altogether if you can.
Other ways to be improve your serviceability
Getting rid of your credit card is not the only way to up your serviceability status and chance of securing a home loan. We have a host of tools at our disposal we can use to sharpen your serviceability, including ways to help you assess your borrowing capacity. If you’d like some further assistance on this front, please feel free to call us.