The damage a credit card can have when you go to apply for a home loan

Credit card customers may be significantly reducing how much money they can borrow when they go to get a mortgage. FIND HOW MUCH LESS YOU COULD BORROW

Home loan applicants could be restricting their borrowing power by tens of thousands of dollars simply by having a credit card.

Many Australians might be none the wiser that having plastic — with or without debt on it — can significantly hinder how much a bank will lend.

New analysis by financial services firm Canstar has revealed for a single earning $85,000 with annual expenses of $16,500 — and no credit card — they could borrow $482,000.

However, if a single held a $20,000 credit card this would mean they could only borrow $354,000 — or $128,000 less.

Couples without a credit card earning $170,000 per year could borrow $1.13 million.

This would be reduced to $1 million — or $128,000 less — if they held a $20,000 credit card.

Canstar’s group manager of research and ratings, Mitchell Watson, said anyone applying for a mortgage should know banks closely examined whether they had any credit cards.

“It’s not about looking at how much you owe, it’s looking at how much you could possibly owe,” he said.

“If you do have a $20,000 card, the lender will view it as if you have used that full $20,000 and how much it would cost you to repay it over the next three years.”

A couple who are stressed about money working out their finances together and assessing their credit card debt. Picture: iStock.

Borrowers should also be aware lenders often assess a credit card limit as if it was maxed out and the card’s cash advance rate applied. This rate is often higher than the purchase rate.

For instance, a card might have a purchase rate of just 9 per cent, but the cash advance might be triple this at 27 per cent.

Lender loans.com.au’s managing director, Marie Mortimer, said financial institutions looked “at the credit card the customer might have and the limit of that credit card”.

“A credit card is another form of debt for a customer, so if you have another debt we look at your ability to repay your loan and your ability to repay other loans that you have,” she said.

“It’s not just a credit card limit that we look at, we also consider your credit score and this can be impacted by having a credit card.”

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She said a customer’s credit score could be positive or negative, depending on how good the customer was at paying back the debt.

Mr Watson said the best thing mortgage applicants could do would be “look at either getting rid of the credit card altogether or at least how you can reduce your debt”.

“One of the quickest ways to do that is to reduce the credit card limit down,” he said.

“The lower your credit card limit the greater the capacity it will allow you to borrow money.”

@sophieelsworth

CREDIT CARDS

Single (earning $85,000) Couple (earning $170,000) Difference

No credit card $482,000 $1.13 million $0

Card limit $10,000 $418,000 $1.07 million $64,000

Card limit $20,000 $354,000 $1 million $128,000

* Based on a 30-year-loan at a rate of 3.89% plus 2.5% buffer

Originally published as The damage a credit card can have when you go to apply for a home loan