Cancelling Credit Cards
So you’re looking to apply for a loan but have been told to reduce or cancel your existing credit card. But why is this? Credit assessment teams within lenders have to review credit card liabilities based on your overall credit card limit, not your balance.
Why do banks only look at your limit?
Even if you don’t use your credit card at all, most lenders will assess your liability based on 2-3% of the limit per month. For example if you had a $5,000 credit card limit, a lender may consider the monthly minimum repayment of $150. This ongoing liability will then be used against your net income to assess your available cash flow. This is where reducing your credit limit becomes important – because in the case of tight cash flow scenarios, reducing your credit limit or even cancelling your credit card outright can free up the cash flow needed for the new loan amount.
Have you been making your repayments at the required time?
Generally if a lenders systems finds that you’re over limit or behind in a single payment on a credit card facility you will be automatically declined on a home loan application. If this was via an oversight it might not be the end of the world however notes Jess from Perth Broker. If you otherwise have an unblemished credit file and repayment history, many lenders will overlook this issue if the credit card is brought out of arrears and a signed declaration is provided from the borrower noting it was from an oversight and will not reoccur.
Does having multiple credit cards impact your ability to borrow?
Borrowers with multiple credit card facilities active can give the impression that they’re under financial pressure and are generally treated as high risk candidates. It’s suggested if you have a weak credit file to cancel any credit cards that you can and do not apply for further credit cards, as applications are also a high risk signal which can limit your ability to apply for home loans successfully.
How to reduce your limit?
If your finance broker requests that you reduce your credit limit to help with your home loan application, you just need to contact the institution which issues your credit card and request that they reduce or cancel your card. They may require you to sign documents to complete this request, so it’s important to do this as soon as possible to avoid potential delays with your home loan request. If your broker only requires a small reduction in your limit, it’s worth considering what limit you realistically need on a monthly basis. A good way to consider this is to look at your overall spending patterns. For example, if you on average will only use $1500 a month on your credit card, a $10,000 limit is probably unnecessary. It’s good to have a limit slightly over your month to month usage in case of emergencies, so ensure you leave extra limit available when requesting a limit reduction.
Once complete, it’s worth requesting the bank provide written documentation to confirm the reduction or closure so your mortgage broker can use this as evidence as being completed with your home loan application.