When looking at your capacity to take on a home loan, banks take a very conservative approach to borrowers with a credit card.
They don’t take a very common sense approach to how you actually use your card so reducing your credit card limits can be a simple way to improve your borrowing power.
Why is reducing your limit a good idea?
Your credit card limit can be the deciding factor in mortgage approval.
That’s because banks assume that credit cards are full drawn when assessing your serviceability or borrowing power.
For example, you could have a credit limit of $3,000 per month but generally only use $1,000 per month.
If you were earning $70,000 per annum and wanted to borrow $430,000 to buy a home, your application would be denied.
However, by reducing your limit to $1,000, you get approved with at least one of the lenders on our panel.
Please call us on 1300 889 743 or complete our free assessment form and we can run through some numbers with you.
You can also get an idea of where you stand by giving our borrowing power calculator a try.
How can I reduce my limit?
To reduce credit card limits, simply call your credit card provider and ask them.
Just make sure that you’re the primary cardholder calling and not a supplementary card holder.
You can reduce your limit as many times as you want and it usually takes 24-48 hours to take effect with most banks and lenders.
The lower your credit card limit, the more you can borrow.
Can you cancel your credit card instead?
If you’re in a position to do so, you can cancel your credit card instead.
As far as unsecured credit goes (credit not backed by an asset like real estate), your credit card should match your asset position including your income level.
If you have a high credit limit compared to your asset position, this is generally frowned upon by the banks.
Cancelling your credit card can be a good step to borrowing the amount you need so simply call your credit provider and ask them to do so.
Also, ask for a letter as evidence to provide your bank when applying for your mortgage.
Before you close the card, don’t forget to use up any points you have!
You can transfer them to a frequent flyer program or spend them.
What proof do I need?
Whether you’re reducing credit limits or cancelling your card completely, ask the credit card provider to email you a letter confirming the limit has been reduced.
Other evidence that may be acceptable:
- A screenshot of your internet banking showing the new limit.
- An old statement so the bank can match you with your account number shown in internet banking.
What if I spend more each month than my new limit?
You can put funds into your credit card account so that it’s in credit.
For example, if your limit is $5,000 and your family tends to spend $10,000 per month, this can be difficult to manage.
You can deposit $5,000 cash into your card so that $10,000 is available even though your limit is only $5,000.
What if you still can’t borrow enough?
Have you reduced your credit limit or cancelled your card completely and still can’t borrow the amount you need?
Call us on 1300 889 743 or complete our online enquiry form and we can let you know which lenders can help.