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The biggest misconception amongst borrowers is that if you pay off your credit card every month, it won’t impact borrowing capacity or loan application.

Reality is, lenders don’t see it this way and never have. When assessing one’s liabilities and their ability to service a loan, most lenders treat a credit cards as if they are maxed out.

Banks will assess your loan application based on income and your current debt levels. They take in to consideration your full credit card amount, therefor having a higher limit can substantially reduce your ability to borrow. It’s seen as a liability that the person may have in the future whether it is used or not. Up to 60% can be considered by the lender as the figure of yearly repayments. For example, if you have a credit card limit of $10,000, most lenders will assume the minimum monthly payment to be between $200 and $300 per month. This applies whether you owe $10,000 or $10 on the credit card account at the time of application.

Understandably this is why credit cards are seen as such a big liability. They also imply to the bank a lifestyle supported by credit. In short, if you don’t require you limit to be as high as they are then reduce them as low as possible months before going through the application process.

A credit card limit of $40,000 can reduce your borrowing capacity by $160,000 (4 x the credit limit). So speak to your mortgage broker before applying for a loan. They will be able to advise if you need to revise your credit card amount and whether they foresee you running into any issues with certain banks and lenders.

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