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If you’re not in control of your credit card, you’re not really in control of your financial life.
An over-the-top generalisation? Actually, it’s not. With countless thousands of hours talking one-on-one with people about their finances … I’m happy to say that is, sadly, too true.
What most people don’t understand is the impact the plastic fantastic has on the bigger picture of your finances.
Including the biggest picture of all – getting loans for homes, or investment properties.
So, for anyone out there thinking about getting a home loan, or buying an investment property … here is how credit cards are the cancer to your finances, from the banks’ point of view.
Facts you probably don’t know about credit cards and home loans …
Fact #1. Banks don’t really care about how much you owe on your credit card. Their primary concern is about what your limits are.
You could have three credit cards, each with a $15,000 limit (total $45,000) but literally never, ever, use them.
That you never use them simply doesn’t matter. If you owe nothing, or the whole $45,000 on them, banks will see them the same. Because, YOU COULD fully draw the entire limit at a moment’s notice.
A credit card is, effectively, a line-of-credit. You can pull the lot out of a hole in the wall, or go on a spending spree, in a matter of minutes.
And because you can do that …
Fact #2. Banks assume that your credit cards are maxed out. Permanently. Literally.
If you have credit card limits of $30,000, a bank will assume that you owe $30,000 on those cards, for the purpose of determining your “serviceability” for the loan.
Therefore, you need to put aside up to 3 per cent a month to cover the minimum repayments. For $30,000 worth of credit card limits, the bank assumes you need up to $900 a month just to fund the minimum repayments on your cards.
Even if you owe absolutely nothing on your cards …
That $900 a month, you should understand, will have a HUGE impact on your ability to borrow money.
Fact #3. Every $1000 you have on a credit card will reduce your ability to borrow by between $3000 and $5000.
Let’s take two people going for a loan. They earn the same amount of money. They have the same savings for a deposit. One has a credit card limit of $40,000, the other has a limit of $10,000.
Who is going to win at auction?
The one with the $10,000 limit.
Why? Because banks will lend that one more money. The person with the $10,000 limit will have lower repayments.
If you have $30,000 more in credit card limits – that is, you have a $40,000 limit when you only need $10,000 – the impact will be a reduced bank approval of between $90,000 and $150,000.
Fact #4: They will look through your credit cards to see what you spend money on.
That should scare some people witless! It’s bad enough your partner could find out! But, the bank?!
In most cases, they will ask to see your last three months of credit card statements, particularly if you are going to refinance your credit card debt to the new lender.
If you have regular penalties or fines from your credit card provider for late payments, they will see it. And it could come back to bite you.
It can also turn you into a liar if you say that your monthly spending is $2500, but you spend $4000 a month on plastic. Mmmm, bugger.
Fact #5. Don’t cut your credit card limit until you need to.
More advice, than fact. If you’ve read the above and are now thinking that you need to reduce your credit card limits to get a loan approved … don’t panic just yet.
Banks will accept, as a condition of a loan being approved, that you make an agreement to have a credit card limit reduced. That is, you can promise to reduce your credit card limit before the loan is settled. Banks will require written proof that you have done so, before they will settle on the loan.
Credit cards aren’t totally evil. If you understand how they cause financial pain, you can limit the damage.
Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.