How credit cards affect borrowing power

With living costs still high and household budgets under pressure, many Australians are using credit cards more often than they’d like. According to Roy Morgan, over one in three Australian credit card holders now rely on credit to make ends meet.

But when it comes time to apply for a home loan, those credit cards can have a bigger impact on borrowing power than most people realise. Understanding how lenders view your credit cards could mean the difference between securing your dream home and falling short.

Why lenders look closely at credit cards

When assessing a home loan application, banks want to understand your ongoing financial commitments. A credit card, even one with a zero balance, is treated as a potential liability because you could use the full limit at any time. In other words, the bank isn’t assessing how much you currently owe, but the risk of what you could owe.

Lenders apply this conservative assessment because credit is readily available. Even if you're a disciplined cardholder who clears your balance monthly, the bank must consider that you could theoretically max out your cards at any time. From their perspective, they're assessing the worst-case scenario of your financial commitments.

How banks calculate this impact

Most lenders assume that a percentage of your credit card limit must be counted as an ongoing monthly repayment. While the exact number varies between banks, a common benchmark is 3.8% of the limit.

For example:

●      A $10,000 credit card limit may be assessed as a $380 monthly repayment.

●      A $20,000 limit may be treated as a $760 monthly repayment.

Even if you don’t owe anything, the bank includes this “theoretical repayment” when calculating how much you can borrow.

Because home loan borrowing power is largely determined by surplus income (income minus expenses and liabilities), even a small monthly repayment can reduce how much you’re eligible for.

While figures vary depending on income, lender and overall scenario, a rough guide is that every $1,000 of credit card limit can reduce borrowing power by $4,000 to $6,000. A card with a $15,000 limit might reduce your borrowing capacity by $60,000 to $90,000. For a couple with two credit cards at $15,000 each, you’re looking at a potential reduction of up to $200,000 in borrowing power.

Why this matters for professionals

Some professions, like those in the medical sector, often hold higher-than-average credit limits due to income, work-related expenses or travel. While this reflects financial strength, it can inadvertently work against you during a mortgage application if lenders consider your card limits as potential liabilities.

One card type to be aware of is the no-limit AMEX card, which is commonly held by doctors. Lenders require three to six months of statements for these cards and will scrutinise expenses, often treating the highest balance used during that period as the effective limit. This can dramatically increase the theoretical monthly repayment in the bank’s eyes.

For example, a client of Clear Path Home Loans had used an AMEX for a European holiday five months prior to applying, racking up a $48,000 balance. The lender used this as the assessed limit, which significantly impacted borrowing power. In cases like this, the only option may be to close the card, which can slow down the application process.

What you can do before applying

If you are planning on getting a home loan, there are some steps you can take to boost your application for lenders.

1. Reduce your balances: Pay down the amount owing on your credit cards as much as possible before applying.

2. Close unused cards if recommended: After discussing with your broker, you may choose to close unnecessary cards.

3. Avoid no-limit AMEX cards or similar: These cards can create challenges in applications because lenders must scrutinise statements and use the maximum balance as the effective limit.

4. Work with a broker: A broker can help you understand how lenders assess credit cards and package your application efficiently. For busy professionals, this can save time and avoid delays.

If you want to buy, upgrade or refinance, Shane Stewart at Clear Path Home Loans can guide you through the process and help you feel confident about what lenders may look for in your application.

Ready to understand your true borrowing capacity? Contact Shane Stewart at Clear Path Home Loans for a tailored assessment of your financial position.