Credit Card Servicing Crunch
Your credit card will affect your loan application. Unfortunately, most borrowers assume it will not affect their borrowing capacity because they pay off their credit card debt every month. This article will explain how your credit card will lower your borrowing power, as well as what you can do about it.
Common misconceptions of borrowers:
“It’s okay to have many credit cards. It means I’m a low-risk borrower.”
“Paying my card balance monthly will help improve my borrowing power.”
“I don’t use my credit card, so my chances of getting an approval are high.”
How Lenders Assess Your Home Loan Application
It doesn’t matter if you’re a good payer, don’t use your credit card at all, or have multiple credit cards. The reality is most lenders don’t base their assessment on your credit card balance.
Banks have always assessed loans using a percentage of the credit card limit for servicing purposes, however considering APRA and responsible lending reviews this assessment technique will change dramatically and will potentially affect your loan approval process and definitely reduce your capacity again.
As an example, let’s assume you have a card limit of $10,000, remembering the limit of the card is the trigger not the amount owning:
Traditional method lender generally uses 3% of the card limit ie:
$10,000 x 0.30= $3,000/12 months = allocated monthly repayment of $250.00 considered in the bank’s servicing model.
Proposed method (just announced by a lender) will be based on using 45.6% of the card limit. How does this affect you?
$10,000 x 45.6% = $4,560/12= $380.00 per month considered for servicing commitments. Does not seem much, but this is an increase of $152%
Banks must be constantly looking and reviewing their lending policies to ensure responsible lending requirements for the assessment of credit cards which requires customers to be able to demonstrate they can afford to repay their limits in full over three years.
The repayment assigned to credit cards (both new and existing) is now 45.6%p.a. of the credit card limit, a method I am sure other banks will follow with and may be higher, we do not know yet.
How to Improve Your Ability to Borrow
Before approaching lenders, have your credit card limit adjusted, so it’s as low as possible. If you have a high card limit, ask your provider to lower it. Your provider will provide you with a written notice of the reduction. Make sure to keep a record of it.
In addition, you can get in touch with a finance broker. Finance brokers can give you all the information you need to know about credit card limits and their impact on your ability to borrow money. This will help you have enough time to adjust your card limits if it’s necessary. Easy to resolve though, simply reduce or cancel those credit cards, it will now help you in more ways than one.
As always just keeping you in the loop. A tight lending market will continue for the foreseeable future.
Any further information please contact Active Invest , we are ready to assist you.
Happy Lending!!!
Rod Peirce
Active Invest