The Real Cost of Credit Cards on Your Mortgage Capacity
Credit cards are a familiar fixture in most New Zealand wallets. From everyday groceries to online shopping, they offer flexibility and convenience. But when it comes time to apply for a mortgage, those little pieces of plastic could be reducing your borrowing power more than you realise—regardless of whether you carry a balance or not.
Here’s how credit cards affect your mortgage application, and what steps you can take to minimise their impact.
The Hidden Burden of Credit Limits
It’s easy to assume that your credit card only matters if you’re carrying a balance. After all, if you’re not using it, what’s the harm?
Unfortunately, that’s not how the banks see it.
When you apply for a mortgage, lenders assess not only your current debts but your potential liabilities. That means if you have a $10,000 credit card—even with a zero balance—the bank assumes you might max it out tomorrow. And because you’d then have to make regular repayments, they reduce your assessed income accordingly.
Typically, banks apply a 3-5% repayment rate to your total credit card limit (not balance). So a $10,000 card could reduce your borrowing power as if you’re paying $300–$500 per month in debt repayments—even if you never actually use the card.
If you’ve got multiple cards or a high limit "just in case," this can add up fast.
Minimum Payments and the Misconception
Let’s say you owe $1,000 on a card with a $10,000 limit. Your bank might require a minimum monthly payment of $50. However, for mortgage purposes, they will assess that card as requiring a payment of $500—based on the limit, not the balance.
This can be a big shock for first home buyers or anyone refinancing. You may be penalised for access to debt you’ve never used and don’t intend to. That’s why it’s often recommended to reduce your credit limit—or even cancel unused cards—when preparing your application.
Should You Consolidate Credit Card Debt into Your Mortgage?
On the surface, rolling high-interest debt (like a credit card at 20% interest) into a home loan (currently around 6-7%) seems like a smart move. And it can be—if it’s managed carefully.
But there’s a catch. Mortgages are typically 25- to 30-year terms. Spreading short-term debt over three decades means you might end up paying more interest in the long run, even at a lower rate.
Let’s say you consolidate $5,000 of credit card debt into your mortgage:
At 7% over 30 years, you’ll pay around $11,960 in total repayments.
The same $5,000 paid off in two years at 20% interest costs about $6,100.
That’s nearly double the total cost when spread across a mortgage term.
Refinancing works best when you treat that debt separately within the mortgage (such as using a separate loan facility) and make higher repayments to clear it faster. Talk to your mortgage adviser about structuring your loan to ensure your credit card debt doesn’t hang around for decades.
The Bigger Picture: How Your Budget Impacts Borrowing
Beyond just the numbers on your credit cards, lenders are looking for a broader picture of your financial health. That’s where a solid household budget can make a real difference.
Demonstrating that you manage your expenses well gives lenders confidence that you’ll handle a mortgage responsibly. It can also help you identify where your money is really going—so you can divert more towards debt repayments or savings.
Some quick wins to improve your budget:
Review your subscriptions and cancel anything you don’t use.
Plan meals and shop with a list to avoid food waste and impulse buys.
Track your spending with budgeting apps like PocketSmith or Sorted.
Focus on paying down high-interest debts first.
Avoid using credit cards for everyday expenses unless you repay them in full each month.
First Home Buyers: Why Credit Cards Are Especially Risky
If you’re preparing to buy your first home, banks are already assessing your deposit size, income stability, and spending habits. Throw in a $15,000 credit card and you’ve just reduced your borrowing power—potentially by tens of thousands of dollars.
Even if you plan to close or reduce your card after getting approved, it’s better to do so before your application. Lenders assess your financial position at the time of application, and often won't revisit it unless the deal changes.
A small tweak like dropping your credit limit by $5,000 could boost your borrowing capacity significantly, especially if you're close to qualifying thresholds.
Prudent Credit Card Habits That Strengthen Your Application
If ditching your card isn’t an option, you can still take steps to reduce the impact:
1. Reduce your credit limits.
Only keep what you realistically need. This helps you appear less risky to lenders.
2. Pay more than the minimum.
Showing consistent debt reduction demonstrates responsibility.
3. Clear balances before due dates.
Avoid interest charges and keep your credit score healthy.
4. Use credit sparingly.
The lower your balance, the lower your risk profile.
5. Monitor your credit report.
Check for errors or signs of identity theft and keep your score in good shape. You can access your report for free through Centrix, illion, or Equifax in New Zealand.
What About Buy Now, Pay Later (BNPL) Services?
While BNPL isn’t assessed in quite the same way as a credit card, it’s still a form of debt. Regular payments to providers like Afterpay or Zip show up in your bank statements and reduce your available income.
If you’ve got multiple BNPL services running, it could raise red flags—especially if it appears you’re relying on them to manage everyday spending.
Making Your Credit Work for You
Credit cards aren’t inherently bad. Used wisely, they can offer convenience, rewards, and even help build your credit history. But when it comes to applying for a mortgage, it’s essential to understand how your credit limit, repayment habits, and overall debt profile affect your ability to borrow.
By trimming your limits, paying down balances, and showing responsible use, you’ll be in a stronger position when the time comes to secure a home loan.
Mortgage-Ready? Time to Take Control
Getting your credit card balances and limits under control isn’t just about getting approved—it’s about setting yourself up for long-term financial success.
Your mortgage adviser can work with you to review your overall credit exposure, help you understand your borrowing limits, and create a plan to get your finances in peak shape.
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