Home loan applicants chopping up credit cards to woo banks and lenders

Tighter lending restrictions due to the banking royal commission are forcing Aussies to be more vigilant with their spending.

Australians are taking a more responsible approach to spending by chopping up their credit cards and improving their shot at getting a home loan, new figures suggest.

The number of withdrawals from ATMs across the country were at the lowest level for a November in 17 years, according to data from the Reserve Bank released on Monday, with ATM transactions falling 3.9 per cent.

The figures also revealed the number of active credit users fell 0.4 per cent between May and November to just under 16 million.

Are Australians ditching credit cards to boost their mortgage application? Picture: AP Photo/Elise Amendola

Canstar financial services group executive Steve Mickenbecker said the fact credit card debt is not going down at the same rate as the number of cards or credit limit is being provided suggests cards are being retired.

With banks applying tighter restrictions to lending as a result of the Financial Services Royal Commission, the screening process for credit scores is now more rigorous for home loan applicants.

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And Mr Mickenbecker said people are likely being encouraged to close off cards they don’t need.

“People are applying for loans and being told that having an extra card and having surplus credit available is actually not a good thing for your credit score,” he told news.com.au.

Many people view credit cards as a buffer or as an option to keep paying off mortgages if they lose their jobs or are short on repayments.

But Mr Mickenbecker said this is wrong.

“Lenders are more inclined to say if you’ve got $30,000 extra credit you can get, even though you’re not using it today, we could find you in trouble with credit card debt in the future where you don’t need any approval, you just run up the debt,” he said.

“Having that surplus card with a large limit that you’re not using is not a positive for your credit report or score. It’s actually a negative.”

The credit expert expects banks to continue to be vigilant on loan applications for the next couple of years, but encourages potential buyers to look at the tighter environment as a positive.

Canstar’s Steve Mickenbecker said having extra credit cards doesn’t help when applying for loans.

Buyers were struggling to keep up with the rising prices during the property boom and were committing to purchases out of desperation and fear they would soon be priced-out further.

The recent drop in prices in Sydney, Melbourne and Perth now provides first homebuyers with a chance to resist the panic purchase and shore up their finances.

“They can now take a more orderly view to preparing for the moment, and that can mean being able to save for another year and get your deposit up and maybe avoid paying lenders mortgage insurance, which is maybe $15,000 worth that you don’t see ever again,” Mr Mickenbecker said.

“It can give people the confidence that they don’t have to panic into it and they can actually get their finances in order before they take that big step.”

RateCity’s Sally Tindall also said there was a relationship between tougher lending standards and the decline of credit cards.

“2019 could be the year that finally bursts the plastic bubble,” she wrote in a note on the data.

“People applying for home loan in 2019 might choose to cancel their credit card or reduce their limit in order to get their home loan application over the line.”

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Originally published as Home loan applicants chopping up credit cards to woo banks and lenders