How Credit Cards Affect Your Borrowing Power

The Role of Credit Cards in Your Financial Snapshot

Credit cards are a staple in many people’s wallets. They offer flexibility around daily spending to emergencies. While you might expect that only your current balance matters, banks take a much broader approach when you apply for a mortgage or any significant lending product. Essentially, your credit cards can influence how much you can borrow, even if you rarely use them or consistently pay them off in full.

Why Credit Limits Matter More Than the Balance

A common misconception is that if you’re not carrying a balance on your credit card it should have no effect on your ability to borrow. However, lenders don’t just consider what you currently owe, they calculate the risk of you potentially using your full credit limit at any time. That means even if your balance is zero your borrowing power could drop simply because of the amount you are allowed to spend.

Typically, banks assume you might max out any available credit at any time. To account for this possible liability, they factor in a notional monthly repayment (usually between 3% and 5% of the full credit limit) into your debt commitments. For instance, a $10,000 card could reduce your assessed borrowing capacity as if you’re taking $300–$500 away each month in repayments, regardless of whether that’s actually happening.

Having multiple cards or ‘high just in case’ limits amplifies this effect. It’s not uncommon for people to be surprised when their home loan approval is lower than expected, all because of unused (or seldom used) credit cards sitting in the background.

Minimum Payments: The Hidden Assessment

Let’s suppose you owe only $1,000 on a card with a $10,000 limit. For you, the minimum repayment might be $50 each month, but for banks it’s as though you need to pay $500. This discrepancy can catch first home buyers and refinancers off guard. No matter how disciplined you are lenders will use the higher figure tied to your overall limit, not your actual balance. That’s why, if you’re considering a mortgage application, reducing your limit or cancelling unused cards is a powerful first step toward increasing your borrowing power.

Debt Consolidation: Caution with Rolling Credit Card Debt into Your Mortgage

If you’re juggling high-interest debts like credit cards it can be tempting to roll these into your home loan. It’s true that mortgage interest rates are much lower than most credit card rates. However, your mortgage will likely last much longer - often up to 30 years. This means that, unless you pay off the consolidated amount quickly, you might actually pay more in interest over time, despite the lower rate.

For example, $5,000 of credit card debt at 20% paid off over two years costs about $6,100 all up. If you roll the same $5,000 into a mortgage at 7% over 30 years, you’d pay almost $12,000 in the end. The convenience can come at a cost so if you go down this path make sure to set up a separate loan account or commit to quicker payments for that debt.

Your Budget and Borrowing Power

Banks look at your overall financial health, not just your credit cards. A solid household budget helps demonstrate that you can manage your income and expenses responsibly. This confidence can make lenders more willing to lend and gives you a clearer picture of where your money is going. Taking steps like cancelling unused subscriptions, planning meals to prevent overspending and diligently tracking your outgoings can free up extra cash for debt repayment and mean more headroom when the bank crunches your numbers.

Avoid using your credit card for daily spending unless you’re sure you can clear the balance each month. Reducing your reliance on cards and showing consistent savings habits boosts your profile in the eyes of lenders.

First Home Buyers: The Extra Risk of Credit Cards

When you’re buying your first home banks already scrutinise your deposit, earnings history and how you manage your money. A large credit card limit can reduce the amount a bank is willing to lend, sometimes by tens of thousands of dollars. Even if you intend to deal with your cards after approval the assessment is made based on your position at the time of your application. That’s why, if you’re close to a lending boundary, lowering or cancelling your credit card limits ahead of time can make all the difference.

Smart Credit Card Habits for Loan Readiness

If cancelling your card isn’t practical you can still act to reduce its impact. The first and most effective option is to lower your credit limits to what you realistically need and use. Always try to pay more than the minimum due and clear your balance before the due date. This keeps you from incurring interest and helps maintain a healthy credit score. Use your card sparingly, monitor your credit history for errors and consider requesting your free credit report from agencies like Centrix, illion, or Equifax to ensure everything is in order before you apply for a mortgage.

How Buy Now, Pay Later Services Factor In

Buy Now, Pay Later (BNPL) isn’t always assessed exactly like a credit card but lenders will include it as part of your debt obligations. Multiple BNPL payments signal you may be using credit to manage everyday living costs, which can be a red flag during a lending assessment.

Making Credit Cards Work for You, Not Against

Used wisely credit cards can build your credit history and provide useful benefits. However, as you prepare to apply for a home loan it’s crucial to understand how banks view them. Reducing your limits, clearing balances and practicing responsible habits will not only increase your borrowing power but also set you up for future financial wellbeing.

Adjusting your credit limits and reviewing your credit report are practical actions you can take right now. And if you want advice tailored to your situation then a mortgage adviser can guide you through tidying up your finances so you enter the mortgage application process in the best possible shape. Careful planning today means you’re putting your best foot forward as you take the next step towards home ownership.