How Does A Credit Card Affect My Credit Limit
A credit card is often the liability that clients will forget the most, I find. That and the “zip pay,” “afterpay accounts.”I find that most clients tend to let their lender increase the limit on their credit card when prompted. Lifting credit card limits, even though they might not be required or used, from a client’s perspective, is understandable. The increased limit often gives clients that little bit extra security. Knowing that if you were in a financial pinch, you would have a credit card with a certain amount of credit available to you, should the situation require it.
For the total newbies out there, your credit card limit is the amount that you can spend to of the banks’ money. Effectively a loan on a card. Interest rates on these cards are high, and you usually get a three to six month, 0%, grace period within which to pay it before the interest kicks in.
I digress, though. When interviewing clients and asking about their liabilities, when we start having a chat about liabilities, they have, and credit cards and their limits. The first thing they will tell me is the limit is x, but I owe nothing on the card. This thought process can cause issues in two ways I usually find. Firstly lenders use the limit of a credit card as a liability, which it is. “Why,” you ask. Even though currently, your balance on your card may be zero, and historically it has been as long as you have had the card. You always have the ability to go and max the card out once your new home loan has settled.
Now on top of your home loan repayment, you have a credit card repayment, which may cause your household to go into arrears. Hence lenders take your credit card limits as the basis to work out what your repayment would be on a monthly basis should you choose to max out your card. They then use this repayment in their mortgage servicing calculator. In some cases, this can severely bring down your lending limit, or put the home you were looking at out of reach.
To give an example, if you had a $15000.00 credit card limit, post-Royal Banking Commission, most lenders will take the monthly repayment to be 3.8% of that amount. This works out to a $570 monthly repayment. Considering that this $570 is after you have paid tax, and is also coming out of your uncommitted monthly income. Uncommitted meaning your free cash, after living expenses and the like have been paid. This repayment has a large effect on the amount of money a lender will lend you. It may be a good idea to have a chat with a mortgage broker Adelaide, to see what your options are here.
Many lenders will allow you to decrease the limit of your credit card. If you owe nothing on the card and do not need it, closing it may be an option. What happens if you have a large balance on the card, and it is impeding you? You may be able to consolidate the card debt into a mortgage to get rid of it and increase your cash flow, or borrowing capacity. Consolidation would need to be carefully considered, though, and it would be wise to consult with a mortgage broker in Adelaide to consider your options. You can read a bit more on consolidation here.
The second issue with the thought process of a limit on a card not being something noteworthy, when there is no amount owing on the card, is that many would-be applicants unintentionally do not disclose all their liabilities. As discussed before, many accounts like “zip pay” or “after pay ” or a store card are missed in this way. Non-disclosure of a debt unintentional or not can mean an automatic decline from a lender. A good way to have a look at your current scenario would be to have a chat with a good mortgage broker. We at Castle Mortgages are great Mortgage Brokers based in Adelaide. We would love to have a chat with you and answer any questions you may have. So why don’t you get in touch with us today?