Your credit card will affect your loan application. Unfortunately, most borrowers assume it will not affect their borrowing capacity because they pay off their credit card debt every month. This article will explain how your credit card will lower your borrowing power, as well as what you can do about it.

Common misconceptions of borrowers:

“It’s okay to have many credit cards. It means I’m a low-risk borrower.”

“Paying my card balance monthly will help improve my borrowing power.”

“I don’t use my credit card, so my chances of getting an approval are high.”

How Lenders Assess Your Home Loan Application

It doesn’t matter if you’re a good payer, don’t use your credit card at all, or have multiple credit cards. The reality is most lenders don’t base their assessment on your credit card balance.

What do they care about?

For them, your credit card limit is what’s important. They see it as a future liability. In fact, for every $1,000 of your card limit, your ability to borrow money for your new home could be reduced by as much as $5,000.

Lenders evaluate the minimum payment as 3% of your card’s limit, regardless of the amount you still owe your credit card company during your loan application. For instance, if your limit is $6,000, lenders will usually assume that your monthly minimum payment is around $180.

How to Improve Your Ability to Borrow

Before approaching lenders, have your credit card limit adjusted, so it’s as low as possible. If you have a high card limit, ask your provider to lower it. Your provider will provide you with a written notice of the reduction. Make sure to keep a record of it.

In addition, you can get in touch with a finance broker. Finance brokers can give you all the information you need to know about credit card limits and their impact on your ability to borrow money. This will help you have enough time to adjust your card limits if it’s really necessary.