How credit cards can affect your home buying journey
Did you know your credit card limit can affect how much you can borrow? Even if you're pretty good about not maxing out your card or making payments on time, having a high limit can impact your borrowing power. Why? Because the bank sees it as potential debt. If you have a $10,000 limit on your credit cards, this is like having $10,000 ready to spend anytime.
To make sure you can easily get pre-approved for a loan, it's a good idea to take control of your credit cards. Here's five simple things you can do to ensure you are in the best possible space.
1. Pay Off What You Owe
Start by paying off any balances on your credit cards before you apply for a loan. This not only increases your chances of getting pre-approved but also means the bank might be willing to lend you more money. If you're not sure where to begin, try paying off the card with the highest interest rate first. It helps you get rid of the priciest debt and frees up money for other debts. If you have a few cards or debts, think about consolidating them - this is something we can help with.
2. Shrink Your Credit Limit
Consider reducing your credit card limit to the lowest amount possible. The smaller your limit, the more you can borrow. Lenders usually calculate your minimum monthly payments based on your credit card limit, typically around 3%. By lowering your limit, you decrease the amount they look at when figuring out your spending. For example, a card with a $10,000 limit will be calculated with monthly payments of $300, even if you only use a bit of it each month.
If you have cards you don't use, think about getting rid of them. This takes away any monthly credit card payments from your mortgage, giving you more room to borrow.
3. Pay On Time
Remember, banks like it when you make payments on time. So, always pay off your credit card in full and on time. It not only shows you're responsible but also gives you extra points with the bank.
4. Get rid of Afterpay
It's probably no surprise, but banks hate the many buy now, pay later schemes that are available to consumers. Again, this is a line of credit that allows you to borrow up to a certain amount, and even if you don't max it out, it is still an available option. We recommend paying off your Afterpay and Laybuy and closing down the accounts before you apply for your home loan or pre-approval.
5. Tell Your Mortgage Advisor Everything
When you're getting pre-approved, make sure to tell your mortgage advisor about all your credit cards and any other debts, even if they're not that big. This helps us to understand exactly how much you can borrow and gives you advice on managing your debt the right way. Hiding debt is something we absolutely do not recommend - always be upfront about everything.
In a nutshell, your credit cards have a big say in your home loan and pre-approval. The trick is to get rid of cards you don't use, pay off what you owe, and always pay on time. By doing these things, you not only make your finances look better but also set yourself up for a successful pre-approval process.
Keen to talk more about buying a property? Get in touch with our team at Loan Market Queenstown and let’s get you on the property ladder sooner. Call us on 03 441 1307 or click here to start your home buying journey.