A credit card can potentially affect your borrowing position even when the balance is low—or even when the balance is currently $0.
When you are preparing to apply for a home loan, you may naturally focus on your income, deposit and existing loans. But there is another part of your finances that can affect your application: your credit cards.
Many home buyers are surprised to learn that a credit card can potentially affect their borrowing position even when the balance is low—or even when the balance is currently $0.
This is because lenders may consider not only what you currently owe, but also the credit limit available to you when assessing your overall financial commitments and ability to service a home loan.
Understanding this before you apply can give you an opportunity to review your finances and make sure your lending structure is appropriate for your circumstances.
Why Do Lenders Look at Credit Cards?
When you apply for a home loan, a lender needs to determine whether you can comfortably afford the proposed mortgage repayments alongside your other financial commitments.
They may consider factors such as:
- Your income
- Regular living expenses
- Existing personal loans
- Vehicle finance
- Buy Now Pay Later facilities
- Student loan obligations
- Credit cards and other revolving credit
- Dependants and household commitments
- Your proposed home loan repayments
Credit cards matter because they give you access to borrowed money at any time, up to the approved limit.
For example, you might have a credit card with a $20,000 limit but only a $500 balance. From your perspective, you only owe $500. However, for a lender assessing your home loan application, the $20,000 available credit facility may also be relevant because you could potentially use that credit after the mortgage is approved.
$0 Balance Does Not Always Mean $0 Impact
This is one of the most common misunderstandings among home buyers.
Credit limit: $15,000
Current balance: $0
You may think the card should have no effect on your application because there is nothing owing.
However, depending on the lender and its servicing methodology, the available limit may still be taken into consideration when assessing your commitments.
This doesn’t automatically mean you need to close every credit card before applying for a mortgage. It simply means that your existing limits are worth reviewing as part of your overall home loan preparation.
How Can a Credit Card Affect Borrowing Capacity?
A lender’s serviceability assessment looks at whether your income is sufficient to meet your existing commitments, normal living costs and the proposed mortgage repayments.
A large credit card limit can potentially add to the commitments included in that calculation.
Consider someone who has:
- Credit Card 1 — $10,000 limit
- Credit Card 2 — $8,000 limit
- Store Card — $5,000 limit
That’s $23,000 of available revolving credit.
Even if the balances are relatively small, those facilities may still influence the lender’s assessment.
For a borrower whose servicing position is already tight, reducing unnecessary credit limits or closing facilities that are no longer required may make a difference. However, the effect will depend on the lender, the applicant’s overall financial position and the lending criteria being applied.
What About Paying Your Credit Card in Full Every Month?
Paying your credit card balance in full and on time is generally a positive financial habit. It can help you avoid unnecessary interest and demonstrate responsible management of your commitments.
But when applying for a home loan, there are two different issues to consider: how you manage the card and how much credit is available to you.
A borrower may have an excellent repayment history but still have a large credit limit. The lender may therefore still take the facility into account when completing its affordability assessment.
Can Multiple Credit Cards Make a Difference?
Potentially, yes. Having several cards can mean that your combined available credit is much higher than you realise.
| Facility | Balance | Limit |
|---|---|---|
| Credit Card A | $0 | $10,000 |
| Credit Card B | $1,000 | $12,000 |
| Store Card | $200 | $5,000 |
| Total | $1,200 | $27,000 |
The borrower may focus on the fact that only $1,200 is currently owing. But during a home loan assessment, the combined $27,000 in available limits may also be relevant.
This is why looking at your entire credit position before applying can be useful.
Should You Reduce Your Credit Card Limit Before Applying?
Sometimes reducing an unnecessarily high credit limit can help your overall lending position.
For example, if you have a $20,000 credit limit but realistically only need $3,000 for normal monthly spending, it may be worth discussing whether keeping the larger facility makes sense.
However, don’t make financial changes purely because you assume they will guarantee a larger mortgage. Every application is different.
Before reducing or closing facilities, it can be useful to speak with a mortgage adviser who can look at your income, debts, deposit, expenses and proposed lending together.
Should You Close Your Credit Card Completely?
Not necessarily. There isn’t one rule that applies to every home buyer.
For one applicant, closing an unused card may improve the overall application. For another, reducing the limit may be sufficient. Someone else may be able to retain their existing card without creating a significant servicing issue.
The right approach depends on your individual circumstances and the lender being considered.
If a card is being closed as part of your home loan application, the lender may also require evidence that the facility has been closed.
Credit Cards and Your Credit History
Credit cards can affect more than serviceability.
Your repayment history and overall management of credit may also form part of the information available when lenders assess your application.
Missed payments, persistent arrears or other credit issues can raise questions during the assessment process.
If there has been a previous credit issue, it does not necessarily mean home ownership is impossible. However, it is generally better to identify and understand the issue before submitting an application rather than discovering it during the lender’s assessment.
What Should You Do Before Applying for a Home Loan?
If you are planning to buy a home, take some time to review your existing credit facilities.
Check the limit, not just the current balance.
You may discover an old card that you rarely use, a store card you had forgotten about, or a credit limit that is much higher than you actually need.
It can also be helpful to avoid taking on unnecessary new debt immediately before a home loan application.
Most importantly, don’t start closing accounts or restructuring debts blindly. Your mortgage adviser can review your overall financial position and help identify which commitments may be affecting the application.
How a Mortgage Adviser Can Help
Different lenders can assess borrowers differently.
A home loan application is not simply about finding the lowest advertised interest rate. The lender also needs to be appropriate for your income, deposit, existing commitments and overall circumstances.
At Mortgage Advisors, we can review your financial position, discuss how your existing credit facilities may affect your application and explore suitable lending options.
If you are planning to buy your first home, refinance, purchase an investment property or simply want to understand where you currently stand, speaking with a mortgage adviser before submitting an application can help you prepare.
Frequently Asked Questions
Does a $0 credit card balance affect a home loan application?
It can. Depending on the lender’s assessment method, the credit limit may still be considered even when the current balance is zero.
Should first home buyers close their credit cards before applying?
Not automatically. It depends on the applicant’s financial position and the lender’s requirements. In some situations, reducing a limit or closing an unnecessary facility may help, but it is worth getting advice before making changes.
Is the credit card balance or limit more important?
Both can be relevant. The current balance shows what you presently owe, while the limit represents the amount of credit available to you.
Can one credit card stop me from getting a mortgage?
Having a credit card does not automatically prevent you from obtaining a home loan. The lender considers your overall financial position, including income, expenses, debts, deposit and servicing capacity.
What if I have several credit cards?
The combined limits can be important. Reviewing cards you no longer need or limits that are unnecessarily high may be worthwhile before applying.
Can previous missed credit card payments affect my application?
They may. Lenders can consider your credit history and conduct when assessing an application. The significance will depend on the circumstances and the lender’s criteria.
Ready to Find Out Where You Stand?
A few changes to your financial position before applying can sometimes make a meaningful difference. Rather than guessing what to close, reduce or repay, speak with Mortgage Advisors first.
