Founder and CEO of Finch Financial Julian Finch is warning Australians about the hidden impact credit cards have on their borrowing capacity and credit rating.
“Many people don’t realise just how much their credit card limits affect their ability to secure a home loan,” Finch said.
“Even if you never use your credit card, banks still count it as a potential debt when assessing your loan application.”
The hidden impact of credit cards on borrowing power
Finch explains that banks use a multiplier effect when evaluating credit card limits.
“For every credit card with a $10,000 limit, the bank will multiply this by five, assuming a $50,000 liability and deduct this amount from your borrowing capacity,” he said.
For example, if a person has two credit cards, one with a $5,000 limit and another with a $10,000 limit, banks will assess the total $15,000 credit limit, multiply it by five and reduce their borrowing capacity by $75,000, even if the cards are paid off in full each month.
“This is a significant amount of money that many homebuyers don’t take into account,” Finch warned.
How to maximise your borrowing potential
Finch advised that prospective homebuyers should take proactive steps to minimise the impact of credit cards on their loan applications:
- Eliminate unnecessary credit cards: If you don’t need multiple credit cards, close the accounts.
- Consolidate your cards into one card: Review the number of credit cards you have and reduce the number down to one if you can.
- Reduce your credit card limits: Lower your limit a few months before applying for a home loan.
- Maintain responsible credit habits: Keeping balances low and making timely repayments can improve your credit profile.
“Credit cards may be convenient, but when you’re looking to buy a home, they can become a financial burden,” Finch cautioned.
“Taking action now can make a huge difference in your borrowing power.”