credit card limits and servicability

From: See Change


One one the questions that the banks always ask people when they are applying for a new loan is what is your credit card limits?

Does anyone know how the banks use your credit card limits in calculating one's serviceability?

Is there a fixed calculation or does ones payment record get taken into account?

Is this a reason for getting rid of cards you don't use and cutting down your limits? MY bank ( which bank ?? ) has a habit of sending me notices that I have qualified for a higher limit without asking me whether I wanted it . To date I've accepted this ... but should I?

Happy investing see change
 
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Reply: 1
From: Anonymous


At times I have only mentioned one card.
$5k limit that is always paid out each mth.

They may check and find another $100000 of credit available with all the other cards.
However the loans seem to be approved without it being mentioned.
 
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Reply: 1.1.1
From: Yuch .


SC,

Don't know about other banks, but regardless you pay off the full amount each month Commonwealth takes 2.5% of your credit limit into account of your serviceability.

Hope this helps.

Regards
yuchun
~ The secret to success is to start from scratch and keep on scratching. ~
 
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Reply: 2
From: Michael G


Hi SC,

I'm sure are local broker Rolf will be able to explain better, but...

e.g.

Income earner on $50k per annum.

Roughly 33% of the gross income is factored for debt repayments (in this case a mortgage).

So 33% of $50k = $16,667

Now if we assume the current interest rate is 7% and the interest rate is Interest Only, then this $16.5k will determine how much you can borrow.

i.e. $16,667 divided by 7% (0.07) = $238,095

So does this mean our friend can borrow $238k?, well not really, since the lenders like to play it safe, so they will in fact determine his serviceability by a higher interest rate (to play it safe), say 1-2% higher.

i.e. $16,667 divided by 8.5% (0.085) = $196,078

Now this figure of $197k, represents TOTAL borrowing capacity, so this includes ALL debt, such as credit cards.

So if our friend has a $10k limit on a few cards, then this will reduce his capacity by $10k, e.g. down to $187k.

Why?, because lenders think that credit cards are instant credit, and our friend here could instantly rack up $10k of debt, which would affect his debt ratio rather quickly.

The only time credit cards dont come into the picture, is when you have it set so the entire balance is paid off at the end of the month, then these figures dont come into calculations.

Getting back to the story, we are left with $187k right?, well this is how much he can borrow. To determine how much he can buy, you just need to work out what LVR (loan to value ratio) you will be using.

If we assume the normal 90%LVR loan, then the $187k represents the 90%, to determine the total value just divide by 0.9

e.g. $187k divided by 0.9 = $206,753

So our friend here can borrow $187k, to buy a $206k property, but only if he has enough cash or equity to over the $18k deposit and $12k of purchase costs (stamp duty, legals, mortgage insurance etc).

Hope that helps...

Michael
 
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Reply: 3
From: Adam Randall


I have learnt sometimes in the past it does not pay to be too honest with banks. If you have a couple of credit cards kept in the bottom draw as a security blanket, and they never get used, just don't tell the bank about them.The Bank cannot magically find out about them (unless you have been overdue for more than 60 days) If they do a CRAA check, applications for credit are the only things that come up, just tell them you were shopping around.
Regards Adam
 
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Reply: 4
From: Rolf Latham


HI SC

Varies from lender to lender.

Some at 0 effect if you can show you pay them off each month, and have done so for at least 3 months.

Some at 2.5, 3 and 5 % of the actual limit is taken off service payments each month.

On average, a $ 10 000 credit card limit costs you $ 45 000 capacity on an average 30 year P&I Mortgage.

We need to remember that unsecured debt such as credit cards is available much more easily than secured - mortgage debt.

Ta

Rolf
 
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Reply: 3.1
From: Rolf Latham


Hi Adam

This is a commonly used approach - not as rare as you might think and "generally" frowned upon by most brokers not just the banks. Basically the lenders are protecting their position less than yours.

If there was no consumer credit code and allied legislation then you would find that you could borrow whatever you wanted if you have the equity. This is ALREADY the case with no docs, lite docs investment loand.

Usually though a client and his/her advisor can make a judgement call whether this is or is not a wise thing to do. For some people this is financial suicide since they have no control over their spending.

One must rememeber that if you are less than frank in your Assets and Liabilities statements and you subsequently default on your owner occupier loan, then you have little protection from the consumer credit code.

Ta

Rolf
 
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Sim

Administrator
Reply: 3.2
From: Sim' Hampel


On 7/14/01 9:40:00 AM, Adam Randall wrote:

"I have learnt sometimes in the past it does not pay to be too honest..."

Remind me never to have any business dealings with you Adam :p

 
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Reply: 1.1.1.1
From: Rosemary McKenzie


On our credit card listings we always list the Amex as "unlimited" it really messes up THEIR figures, and most times they tell us not to put it on the list.

Unfortunately the $10K limited one messes up OUR figures! So guess which one's next on the cut up list.
 
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