Do credit cards have an effect on your borrowing power when applying for a loan? Yes, and it's not just about how much you owe either!
Your credit card limit can have a direct effect on how much money the bank will be prepared to lend you when applying for a loan.
Why? When you apply for a home loan, the lender will look at your ability to service that loan. That means they won't just look at the amount owing on your credit card and your minimum monthly repayments. Instead they will consider what your total repayments would be if you were to max out that credit card!
Lenders are aware that credit card holders have the ability to use up to the full limit on their credit card and therefore need to take this into account when determining your repayment serviceability.
Put simply, the more credit cards you have, and the higher total credit card limit you have, the more impact it will have on your borrowing power. This could be the difference between gaining approval on your loan application or not!
How Can You Improve Your Borrowing Power?
- If possible, consolidate your credit card debt and cancel cards that are no longer needed. This will reduce your monthly interest repayments and free up income for other repayments.
- Reduce the limit on your cards to the lowest practical amount for your personal situation.
- If you have more than one credit cards and significant debt, consolidate all debt and work on a strict strategy to reduce the debt.
- Once your credit card is paid off, consider limiting yourself to a debit card and focus on putting savings into a separate account for when you need it.
Once you have reduced your outgoings each month this additional income can now be considered by lenders as available income that can be applied to your mortgage repayments. This can boost your borrowing power and take you one step closer to fulfilling your property dreams!
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