Olivia’s Surprising Discovery
Olivia and her partner were shocked when they learned they could only secure a $450,000 loan for their investment property. With the average Australian home costing around $933,000, they expected to be eligible for a much larger loan.
"I was not expecting it to be that low," Olivia said. "Even in these conditions, I did some math, and what the hell?"
The Hidden Culprit: Credit Cards
Olivia soon discovered that their credit cards were the reason for their reduced borrowing power. "I was like, wow, just having these credit cards open cuts our borrowing capacity in half. If we close them, it doubles," she shared on TikTok.
Even though Olivia and her partner used their credit cards responsibly for bills and groceries, banks viewed them as a significant liability, treating them as if they were maxed out, even if the balances were paid on time.
Expert Insights on Credit Cards and Borrowing Power
Barbara Giamalis, the lead broker at Timely Home, explained that many Australians mistakenly believe that having a credit card helps establish a good
credit history. "If you’ve got a $10,000 limit, we base it on that limit, whether it’s at a $0 balance or not. Getting rid of credit cards makes a huge difference in borrowing capacity," she said.
For example, Compare the Market's analysis showed that someone with a $10,000 credit card limit earning $100,000 a year could see their borrowing capacity shrink by $47,000. Eliminating a $15,000 credit card could increase borrowing power by $71,000.
A Practical Solution
David Koch, Compare the Market's economic director, suggested that if you don’t want to cancel your credit card, you could consider lowering your limit. This simple adjustment could significantly improve your borrowing power without entirely giving up the convenience of a credit card.
Conclusion
Olivia’s experience is a valuable reminder for prospective homebuyers to review their credit card limits and consider their impact on borrowing power. By understanding how lenders assess credit and making strategic financial adjustments, you can increase your eligibility for a home loan and move closer to owning your dream property.