Yesterday I got a letter in the post from my Bank saying that I have been pre-approved for a $15,000 credit card – all I needed to do was call the Bank, accept their offer and they will get it out to me in the post. I haven’t accepted their offer, nor will I, but this got me thinking about how quick and easy it is to accumulate consumer debt.
It can seem harmless if you just use if for emergencies – but that same credit card can really impact your ability to get a mortgage. Below we discuss how your short term debt can affect your borrowing power and what you can do to get back on track.
It really is so easy to accumulate short term consumer debt. You see it everywhere you go; want to buy a new TV or the latest Apple product? They will ask if you want to put it on a QCard, or a GEM Visa or any other quick, easy on the spot finance card. Short term debt really affects your borrowing power – a credit card with a $10,000 limit could decrease your mortgage borrowing capacity by up to $45,000 (based on two adults on combined income of $100,000).
“But I rarely use the credit card and it’s really just for emergencies”. I hear you, but did you know from a mortgage lending perspective, even just having the credit card with no balance is counting against you. See, in todays lending world, banks are governed by The Responsible Lending Code – a law that leads to banks using their own strict servicing calculations to see how much you can afford to borrow. That $15,000 limit on a credit card accounts for a $450 per month ‘expense’. Banks assume the worst, as this credit card is an available credit limit, at any given time you could max out this credit card and therefore the minimum monthly payment due would be $450 (3%). This could affect the amount you can borrow for a mortgage by up to $80,000. Now add to this having a few credit cards, a Q Card and a Gem Visa between you both, that could limit your borrowing ability by $250,000 or more.
It’s nice to have a credit card for your everyday living expenses (as long as you’re good with money and pay it off in full each month) so that you can get those Airpoints or some other rewards, but have you considered having a joint credit card with that one $10,000 limit, rather than 2, 3 or 7 cards. The other point worth mentioning, having multiple cards means multiple annual fee’s. Some cards charge $250 per year for the privilege – you do the math!
Even if the credit card isn’t fully drawn, you could go out and spend the available balance when you want, so they have to allow for the expense as if the credit card was fully drawn.When the bank is assessing your application – they want to make sure that this loan and any other debt you have isn’t going to cause you into financial hardship. All debt including personal loans, car loans, hire purchases, credit cards, store cards, GEM Visa, QCards, overdraft facilities etc. all greatly affect your ability to afford your home loan repayments
If you have already accumulated this short-term high-interest debt, what can you do now?
- Plan – Write down a list of all the debt you have, and the interest rates and focus on paying off the higher interest items faster.
- Reduce – If you don’t need it – reduce it or remove it
- Budget – Once you have identified how much short-term debt you have, it is worth looking into why you have this debt. Look at your statements, where is your money going? What are your spending habits? What are your necessities and what can you cut back on? To break the debt cycle, sit down, make a budget and stick to it.
- Consolidate – If your short term debt is becoming hard to manage or you are paying high interest rates, it could be worth consolidating this debt. If you already have a mortgage with available equity, you could look at consolidating this into your mortgage. Otherwise you could look at consolidating your short-term debt into one, easy to manage personal loan. Either way our mortgage broker will be able to help. We can talk you through the process and help you get your finances back on track.
Want to make a plan today? We can help you with your ‘bank interview’ and ensure your mortgage application is seen in the best light. Get in contact for a free consultation and let us help you smash those financial goals. Be good with money.