Aspiring first home buyers could improve their borrowing power by $71,000 by getting rid of their credit card.
Compare the Market Economic Director David Koch said many house hunter hopefuls are unaware of the how detrimental having credit cards can be to their borrowing power.
“There’s a misconception that the bank will just simply subtract the credit card limit amount from your borrowing power – but that’s not true,” Mr Koch said.
“Credit cards can reduce people’s borrowing power by $50,000 or more”.
According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $505,000.00 to $552,000.00, a difference of $47,000.
Even if they had a limit of $2,000, their borrowing capacity would take a $10,000 hit.
| Credit card limit | Borrowing Power with credit card limit | No credit card | Impact |
| $2K | $542,000.00 | $552,000.00 | $10,000.00 |
| $10K | $505,000.00 | $552,000.00 | $47,000.00 |
| $15K | $481,000.00 | $552,000.00 | $71,000.00 |
| Calculations are based on a single with no dependants with an annual income of $100K. Expenses have been calculated using the Household Expenditure Measure (HEM) for the postcode 4000 and a variable rate of 5.99% was used. | |||
Mr Koch said lenders have become much more cautious to account for the risk of recession and will look at anything that may affect your ability to repay a loan.
“If you don’t want to cut up your credit card, you could consider lowering your limit,” Mr Koch said.
“Credit cards can be useful in building up a credit history before buying, but only if you’ve met your repayments, paid on time and remembered to pay the annual fee”.
Other ways to boost your borrowing power:
Know your credit score
Websites like Compare the Market provide free credit score checks to help you understand how strong your borrowing position is. It’s one of the measures lenders use to calculate the risk of your application. Improving your credit score is one way to improve your chances of being approved.
Pay off any debts
Banks must include all financial obligations when calculating your ability to repay debt including credit cards, car loans or personal loans. If you work to reduce or eliminate your high-interest-rate debts, you may be able to increase your borrowing capacity.
Although Higher Education Loan Programs (HELP) can’t accrue interest like credit cards can – it can be brought in line with inflation. For example, in July this year, millions of Australian university students or people who are still paying off that HELP debt were slapped with a cruel 7.1% increase in the amount they owe.
If you have the ability to pay off your HELP debt, then you might consider doing this, as it may boost your borrowing power.
Consider a joint purchase
You could team up with a family member, partner of friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lenders income requirements.
Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one – so you may find your borrowing power increase with an additional person on the loan.
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
Compare the Market is a comparison service that takes the hard work out of shopping around. We make it Simples for Australians to quickly and easily compare and buy insurance, energy, travel and personal finance products from a range of providers. Our easy-to-use comparison tool helps you look for a range of products that may suit your needs and benefit your back pocket.
