Aspiring first home buyers could improve their borrowing power by $71,000 by getting rid of their credit card.
Unknown to many, having a $15,000 credit card limit could reduce someone’s borrowing capacity by $71,000.
Compare the Market Economic Director David Koch said many house hunter hopefuls are unaware of the how detrimental having credit cards can be to their borrowing power.
“There’s a misconception that the bank will just simply subtract the credit card limit amount from your borrowing power – but that’s not true,” Mr Koch said.
“Credit cards can reduce people’s borrowing power by $50,000 or more.”
According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000.00 to $505,000.00, a difference of $47,000.
Even if they had a limit of $2,000, their borrowing capacity would take a $10,000 hit.
Mr Koch said lenders have become much more cautious to account for the risk of recession and will look at anything that may affect your ability to repay a loan.
“If you don’t want to cut up your credit card, you could consider lowering your limit,” Mr Koch said.
“Credit cards can be useful in building up a credit history before buying, but only if you’ve met your repayments, paid on time and remembered to pay the annual fee.”
