What do you mean my credit card with nothing owing is a liability?

That’s right, in the eyes of a bank, any liability you have – like a credit card, afterpay (https://www.uploans.com.au/blog/2019/08/16/afterpay/) or interest free card will be treated in the most risk averse way. 

What that means for your credit card is:

–       If you have a credit card with say a $15,000 limit and you’ve never spent a single cent on it: the bank will treat this as though you owe $15,000 and factor in a repayment of this liability based on that, so that’s what we have to do in our application.

–       If you have a credit card with say a $10,000 limit which you use regularly but pay off each month in full like clockwork : again, the bank will treat this as though you owe $10,000 in credit card debt that you are making minimum repayments on. 

Is it double dipping for them to not only count what you spend on your credit card towards your living expenses, but then to also count it as a liability on top of that impacting your borrowing capacity? Well – effectively yes, but that doesn’t impact how it’s done. If you have an outstanding credit card limit, whether it’s a $12,000 Harvey Norman Go Card, a $20,000 Amex card, a $1,000 bank overdraft or a $2,000 travel credit card you’ve never used – it will count as an ongoing liability and it will impact the amount you’re able to borrow.

Does this mean you need to close everything down immediately? Well not necessarily – that’s why you’ve got a broker so we can guide you.

Sometimes we will need to drop limits or close unnecessary facilities, but let us run borrowing calculations and prepare your application calculations first. 

Sometimes facilities will need to be closed down up front. Other times we’ll recommend we go to the bank and get an approval subject to you lowering a limit or closing a facility down. 

This is also why we request you perform a credit report using Equifax up front to send to us. Often credit facilities you thought you’d previously closed are still open and this can impact your application. For example, those interest free items you bought at Harvey Norman 15 years ago and don’t have the card for anymore may still have an open limit that appears on your credit report, which the bank will assume you can still use at any time.

In short though, we’ll guide you any changes that are required, but just know, if you have a credit card, the bank is going to treat it as though you’ve got it spent right out to the limit.  

Credit cards can be great tools for making contactless payments and for cashflow management, but if your broker asks you to reduce the limit, it’s because your maximum borrowings are affected by that limit.