Applying for a loan? Don’t just pay off the credit cards.
It seems like a no-brainer, right? You are buying a home, so you’ll pay off your credit cards to reduce your debt, but keep them active so you can buy some furniture or deal with emergencies even when you have a mortgage to pay. Wrong.
A lender will consider your credit card debts and the monthly repayments on those when you apply for a mortgage. But what many people do not realize is that credit cards that don’t have any balance owing can also impact a lender’s assessment of what you can afford to borrow.
If you have a high credit limit, you also have a high debt risk in the eyes of your lender. As the logic goes, there is no stopping you from racking up debt on your credit card the day after your loan is approved. Say, on lovely furniture to fill that new house.
Lenders have to take account of at least three percent of the total credit card limit, regardless of what the applicant owes. From this, it can be surmised that if you haven’t put a cent on your credit card for the past five years, a high credit limit will negatively affect your serviceability.
The best thing you can do is lower your credit limit or cancel your credit account. That is if you're not really using it.
“You need to be able to use your full amount of income.”
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Photo by Paul Felberbauer on Unsplash