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How credit cards impact your borrowing power



Did you know that your credit card limit can have a significant impact on your borrowing capacity?

Imagine you have a credit card limit of $8,000. Even if you've never come close to maxing out your credit limit or have consistently made timely repayments, this amount can significantly influence the amount you can borrow. Why, you may wonder? The bank views this as available debt. At any given time, you have $8,000 at your disposal should you decide to max out your cards.


To optimise your borrowing potential and enhance your chances of securing pre-approval with ease, we strongly recommend managing your credit cards before applying with the banks.


So, what should you do to achieve this? Here's what we suggest:


Pay Off Existing Credit Balances

First and foremost, we recommend paying off your credit card balances before seeking pre-approval. This step can substantially improve not only your pre-approval odds but also increase the amount a bank is willing to lend you.

If you're unsure which balance to tackle first, our general advice is to prioritize paying off the debt with the highest interest rate. This strategy helps you eliminate the most expensive debt and frees up funds for repaying other debts. If you have multiple cards or debts, debt consolidation could be a viable option.

Reduce Your Credit Limit We recommend reducing your credit card limit to the lowest feasible amount. The lower your credit limit, the more you can potentially borrow. Lenders typically factor in the minimum monthly repayments based on your credit card limit, usually around 3%. Therefore, by lowering your limit, you reduce the amount they consider when calculating your spending. For instance, a credit card with a $10,000 limit will be calculated with monthly repayments of $300, even if you only use a small portion of it each month.

If you have unused cards, we advise eliminating them altogether. This action removes any monthly credit card repayment calculations from your mortgage and increases your borrowing capacity.


As you can see, credit cards have a substantial impact on your home loan and pre-approval prospects. Our top tip is to eliminate any unused cards and minimise your balance as much as possible. Additionally, remember that banks assess factors like timely repayments, so make sure you pay off your credit card in full and on time for extra brownie points with the bank.


When the time comes to apply for pre-approval, it's crucial to inform your mortgage advisor about all your credit cards and any other outstanding debts, even if they are relatively small. This allows us to create an accurate profile of your borrowing capacity and offer guidance on managing your debt effectively.


Reach out to our Christchurch mortgage advisors today, and we can discuss how your current credit card limits might be impacting your borrowing capacity and the strategies we can implement to reduce debt and enhance your borrowing power.


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