Yes, if your client closes their credit card, their borrowing power will increase, even if they have a clean credit file with no defaults and no missed repayments. This is because banks calculate an individual’s borrowing power using their credit limit.
How banks assess a borrower’s credit limit
In general, banks will assess your credit limit at a percentage between two and three per month, even if you don’t spend enough to get close to your credit limit. For example, if your credit limit is $1,000, the banks will assess your monthly credit card repayment to be around $30 at minimum. When they calculate your borrowing limit, they compare your net income with your net expenses. So, in this case, your monthly costs will increase by $30 when you have a credit card. This will reduce your borrowing power.
How can having a credit card be beneficial for your client?
While having a credit card can reduce your client’s borrowing power, it can also make them a more attractive borrower. For instance, if they only have one credit card, make regular repayment and never reach their credit limit, banks may look on them favourably, as long as they meet all of the lender’s other requirements. If banks can see that your client has a history of making regular repayments on schedule for the total amount, they are more likely to approve your client for a home loan because they believe that your client can make regular loan repayments.
If your client wants to improve their borrowing power, you should urge them to consider closing their credit cards. However, some lenders don’t consider credit limits when determining borrowing power. With these lenders, evidence of regular, full repayments is enough to prove your client’s attractiveness as a borrower.
Mortgage Street is a non-bank lender specialising in home loans. We can help you find the best home with the most competitive rates, whether the borrower has a credit card or not.