If you talk to any mortgage broker in Perth, you will quickly find out that the lending companies have a lot of metrics by which they determine who is going to get credit and how much they are going to get. There are a lot of standard metrics that make common sense, but there is one hidden one that many borrowers don’t know about–credit card limit.
The Basics of Borrowing Capacity
If you have ever obtained a loan, there is a very good chance that you know the basics of how loans are determined. Basically, the lender only loans you what they think you can pay back and charges interest rates based on their confidence that you will be able to do so.
Lenders want to see your current income, your monthly expenses and your current debt to determine how much more money you can put out every month. But there is one hidden metric that can make lenders see you as a risky investment and that is your credit card limit.
Why is Your Credit Card Limit Important?
Lenders don’t want to loan money to anyone they think will run into trouble down the road. They go over your credit history and try to guess at your job security. But why on earth would they use credit card limit as a negative? Doesn’t a high credit card limit mean that other lenders have confidence in your ability to pay them back?
The problem is that credit card debt is expensive debt. In Australia right now, the average interest rate for credit cards is 17.16%. On the other hand, the one year fixed rate at Aussie Home Loans is 4.74%.
As for their confidence in you being a positive, lenders see a high credit limit as a chance for you to get in trouble with an inappropriate amount of expensive debt if you decide to “max out” all of your cards.
What to Do
Thankfully, the solution is easy. Pay off cards, starting with the most expensive and then cancel them. Pare down to one card if possible and use as low a limit as you can bear.
To talk to a financial planner or mortgage broker in Perth about your borrowing capacity, call (08) 9472 9766.