Credit Card Limit Drops Your Mortgage Borrowing Potential
Many first home buyers tend to think it's okay to have credit cards
A couple earning $130,000 a year would find their mortgage borrowing power is reduced by $47,000 simply as a result of having a combined $10,000 credit limit on their credit cards, Mike Pero Mortgages found when it surveyed the banks on their lending policies.
Number-crunching by the company found people's maximum mortgage borrowing at the banks dropped sharply just as a result of having a credit card, regardless of whether they ever carried debt on it.
"Many first home buyers tend to think it's okay to have credit cards as long as they don't ever draw down on them," said chief executive Mark Collins.
But, he said: "That's not how the banks look at it."
"They have to consider that at any point you could draw down on the full amount, so they look at future potential credit card debt when calculating serviceability, rather than just the amount owing."
But though credit cards are practically ubiquitous, financial adviser Liz Koh said some people simply didn't need one.
"Why would you need one, if you are saving to buy a house?" Koh asked.
The argument that it provides emergency access to cash doesn't hold for these people, as they have savings they can draw on in a pinch.
"If you have one, you should choose a low limit," she said.
What Collins found was that a couple earning $130,000 with a combined $5000 credit card limit would decrease their borrowing power by $28,000.
Double the limit to $10,000, and it would drop by $47,000.
A $15,000 limit would see $80,000 wiped off their borrowing power, while limits of $20,000 would see it drop by $97,000.
New Zealand credit card holders have, in aggregate, drawn down on about 30 per cent of their combined credit card limits.
Balances on credit cards are believed to have passed $7 billion, having reached $6.98b at the end of October just before the Christmas shopping frenzy began.
But the combined credit limits on credit cards for the whole country was $22.9b.
Collins said banks were taking a conservative approach to mortgage lending, and said people planning to seek mortgage borrowing in the New Year would help their cause by paying off credit cards, and then getting rid of them completely.
"The plastic tends to get a workout leading up to Christmas and over New Year, so our advice is to be very wary of taking on too much credit card debt," Collins said.
Having a high credit limit you do not need could end up causing heartache.
"That could be the difference between getting the property of your dreams, or missing out completely," Collins said.
Koh encouraged young people to use debit cards instead of credit cards, which means they could continue to shop online when they needed to, but felt many had ended up with credit cards because banks encouraged students to carry them.
But she said whole generations had no access to credit cards in their 20s, proving it was possible to live without them.
Millennial entrepreneur Kendall Flutey, the founder of the Banqer in-school financial education programme, said high-cost city living could make it hard to make ends meet, especially if people racked up bank debts when they were a student on top of their student loans.
"Running a business has its own financial requirements. I have learned to be more diligent with my finances as a result, but it can be super hard at this age," Flutey said.
"I have one friend who still carries an overdraft from university."
For some people debt had become normalised, Flutey believed.
Many people appear to rely on their credit cards in emergencies, research from BNZ showed.
The bank's latest Financial Futures Research found nearly half of people had less than $1000 of emergency savings in their "rainy day" account.
Donna Nicolof, BNZ's head of wealth, said: "All it takes is for your car to fail its WoF and you need a new set of tyres and people without anything set aside can find themselves racking up debt quickly, often on their credit cards."
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