New Zealanders love credit cards for their convenience and flexibility. However, most people don't realize how significantly credit cards impact mortgage eligibility.
Minimum Payments and Credit Reports
Most credit card companies require approximately 3% of the balance as a minimum monthly payment. Missed payments get recorded on credit reports, which banks review during mortgage applications.
The Bank's Perspective
Banks assess credit card debt differently than borrowers might expect. Rather than evaluating actual balances, lenders assume the worst-case scenario: that you've maxed out your card and now owe the full limit. This means a $5,000 card with only $500 charged gets treated as a $5,000 debt obligation.
Mortgage Impact
A $10,000 credit card limit translates to approximately $300 monthly repayment calculations. That $300 reduces borrowing capacity by roughly $43,000 in mortgage lending at current test rates of 7.5%.
Practical Example
Reducing a credit card limit from $20,000 to $5,000 could potentially increase mortgage eligibility by more than $65,000, assuming other financial factors remain favorable.
The Takeaway
Trimming unused credit card limits represents one of the quickest and easiest fixes for improving borrowing capacity before applying for a mortgage.
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