Could your credit card cost you an extra bedroom or force you to change suburb?

Your credit card could cost you $80,000 or a change of suburb

In testing what a lender feels you can afford to borrow for your home, lenders look at many factors which include your existing commitments. This also includes assuming you could go tomorrow and blow the whole limit of your credit card then have to pay it back at the same time as your mortgage.

Most of use use cards as a brilliant tool to avoid carrying cash and collect points, hand in hand with keeping your money in your offset account & we do it very effectively (but they can feel a bit unreal and you could overspend, so be mindful) but bigger issue is if you have a very large limit.

On average (and I say average because the rule varies) lenders take 3% of the credit card LIMIT (not balance, not what you actually spend on the card, the potential) as a monthly commitment.

So, if you have a $10,000 credit card limit, thats $300 a month of your available income gone. $20,000 limit – $600 / month.

That could equate to reducing your loan amount by $80,000 – what would $80,000 mean to you in terms of the home that you could buy? Is it another bedroom, a pool, or a whole other suburb?

But you never spend the whole limit – right? I don’t either. It doesn’t matter.

Under responsible lending provisions the bank has to make sure you can afford all of your current repayments and your current lifestyle, assuming that you might have that blow out above.

I know, there are many arguments as to why this is ridiculous, regardless, that’s how it is.

So, what do I recommend you do?

1) Reduce your limits – typically if you have 55 days interest free on your card your limit could be two months (55 days) worth of living expenses, this makes sense to me.

2) Cancel any unnecessary cards

3) Interest free facilities that come with a card are included in this (and first to go)

4) and finally, they are great tools but don’t let your credit cards get out of hand and don’t pay interest on a credit card if you can avoid it.

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Two Red Shoes Copyright © 2020 All rights reserved. Call on 02 9002 0380, 0404 494 929, email us  or 'old school' fax 02 9002 0381

Jarrett Group Pty Ltd atf Jarrett Group Discretionary Trust trading as Two Red Shoes hold Australian Credit Licence No: 428614 and are members of an external dispute resolution scheme. Details of our complaint resolution process can be found here or please see our credit guide. All information contained on this site is general information only, and does not take into account your particular financial situation or needs. You should consider your personal objectives, financial situation along with the recommendations of your trusted advisors.

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