YOUR CREDIT CARD LIMIT COULD MAKE OR BREAK YOUR HOME LOAN APPLICATION ??
??Did you know that your credit card limit could be affecting your chances of securing the home loan you need??
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Here's why: when Lenders assess your home loan application, they take into account your credit card limits, not just the balance you have owing. Just like your credit score, it plays an important role in determining your financial suitability for a mortgage.?
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The Impact of Credit Card Limits on Your Borrowing Power
Imagine this scenario: You have a credit card with a high limit, let's say $10,000. You've been responsible with your spending and have never maxed out your card. Great, right? Not so fast. In the eyes of a Lender, that $10,000 credit card limit represents potential debt. Even if your current balance is zero, they see that you have the ability to rack up $10,000 in debt at any given moment and this can significantly impact your borrowing power when it comes to a home loan.
This week we look at ways to help improve your borrowing power!
How to Improve Your Borrowing Power??
To maximise your borrowing power and increase your chances of getting the home loan that you need, it’s important to take proactive steps to address your credit cards before you apply.
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1. Reduce or Eliminate Credit Card Limits:? If you have unused credit card limits, consider reducing or eliminating them altogether. While it may seem counterintuitive, reducing your credit card limit can actually improve your borrowing power. Lenders will take into account the minimum monthly payments (usually around 3%) based on your credit card limit, so a lower limit means a lower minimum payment assumption when they are running their calculations. For example: If you have a balance owing on your credit card of $1,500, the minimum monthly payment would be around $45. However the bank will take the minimum monthly payment based on the actual limit, so if your limit was $10,000 then the minimum monthly payment they would account for would be around $300. How much extra mortgage does $300 per month get you? It turns out to be about $40,000 - so you could be missing out on that extra $40,000 towards your new home.
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2. Pay off Credit Card Balances: Paying off your credit card balances can significantly improve your financial profile and increase your borrowing potential. Prioritise paying off high-interest credit card debt first to minimise your ongoing interest charges and free up more funds to pay down other debt or to put towards your mortgage payment.
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3. Consolidate Your Debts: If you have multiple credit cards with outstanding balances, consolidating your debts into a single loan or credit card with a lower interest rate can help simplify your repayments and potentially reduce your monthly payment obligations. If you already have a home loan, talk to your Mortgage Adviser about potentially consolidating the debt into your mortgage at a lower rate, then making a plan to pay it off as quickly as possible so you don't end up paying more interest in the long run.
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Final Thoughts
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The main takeaway here is to make sure you tell your Mortgage Adviser about ALL your credit cards, even ones that are not in use. It’s important that we disclose all credit cards on your mortgage application so we can let the Lender know if you plan to reduce your limits or close the credit card. They will then be able to account for this properly when calculating your borrowing potential.
Working closely with a Mortgage Adviser will enable you to put your best foot forward when applying for a home loan, find a solution to help pay your debt off sooner and show you different debt consolidation options too.
Rodney
?? 0274 555 863