Should I cancel my credit cards before applying for a home loan?

It’s home loan application time. You start enquiring around, filling out forms and consistently see daunting questions such as, “How many credit cards do you have?” and “What is your combined credit limit?”.

What is a Credit Card?

Credit cards are a traditional way of using a lenders money, to make purchases such as groceries, household expenses and recurring subscriptions such as Netflix, Transportation and Gym Memberships. But what about when it comes to applying for a home loan?

Why are home loan applications asking for your credit limit?

Any credit limit you have been issued, is considered a debt. Majority of lenders will take the complete value of your combined credit limit and add it as an expense. If you have a $5,000 credit limit, and your monthly repayment is $100, the lender will add this as a monthly expense, which has a direct impact on your borrowing capacity.

Can having a credit card be positive for my home loan application?

Owning a credit card has several benefits, but we’ll focus on the key benefit that the lender will look at. If you have owned a credit card for 5 years, and made every payment, in full or a minimum payment on time, this is seen as a positive. This is a great indication that you are a responsible borrower, meeting your obligations and repayments on time, which will give the lender confidence is issuing you a loan. Our Home Loan Specialists will be able to provide you with a comprehensive review of your repayment history, credit score and the most appropriate move forward to ensure you are in the best position to secure a loan.

When can a credit card be negative for my borrowing capacity?

A credit card can also work against you. If you have never held a credit card, the lender has no history of repayments, nor do they know if you will be able to make repayments over a longer term (as home loans are generally 20+ years). Alternatively, if you have had a credit card for 5 years and have missed payments and/or been late in making repayments, the lender will carefully assess your ability to make repayments for your requested home loan value. It is vitally important to ensure you continuously make repayments by the due date, to ensure you give yourself the best possible opportunity to maximise your borrowing capacity.

Should I reduce my credit limit?

Reducing your credit limit is dependant on your financial and living situation. If you are only spending $500 per month, but have a $4,000 credit limit, you may consider reducing this limit in order to maximise your borrowing capacity. It’s also important to note, that the lender will request documentation, in the form of a credit card statement showing the current limit. Our Home Loan Specialists will be able to guide you on the best approach in managing your credit limit.

Should I cancel my credit card?

We understand credit cards are a part of our everyday purchase habits. Cancelling a credit card can be a useful tool to increase your borrowing power. It can help you ensure that you are getting the best home loan rate possible, but it is also important to make sure you are able to live within your means, through savings accounts.

12 November 2023