“I have a credit card and I pay it down to zero every month”.
…. And therefore, it’s not a liability I have….
One of the BIGGEST misconceptions in finance when people seek home loans.
Something clients tell us often “I pay off my credit card every month”.
Hoping that the lenders won’t take that as a liability.
The rule with any credit limits is – if you have the limit – it’s considered as an ongoing liability.
If you have a $20,000 credit card – on average lenders take 4% of this amount as an ongoing commitment.
In this case this is $800 per month. So effectively it chews surplus that could go towards your borrowing capacity.
If you have a $50,000 credit card, it’s an ongoing $2,000 liability (at 4% commitment).
So, if you have the income to substantiate these sorts of credit limits, then fine to continue as is.
However, if you’re exploring investing or buying a home, something like this could kill your capacity to borrow any further.
This misconception also extends to home loans…
If you have say a $500k loan and you have $200k in the redraw, it doesn’t mean you have a $300k loan.
Lenders work with credit and loan limits and it’s still considered a $500k loan.
Having said this…
Don’t just go cancelling credit cards though OR for that matter, giving your savings in the re-draw to the bank.
Make sure you review the numbers first along with strategy specific to your circumstances and then determine the best course of action
> To maximise your leverage
> To maintain the tax effectiveness of how you do it
> To minimise the risk
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Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice