Will having or closing a credit card affect my home loan approval?

Disclaimer: The below guide is general in nature and do seek individual financial advice to see how this applies to your situation. Our experienced advisers are on hand to help at no cost to you (T’s and C’s apply)

Should I get a credit card to ‘build’ my credit score?

Easy answer - no. If you’re in New Zealand that is.

This is a really common question I get asked. This belief is often based on how credit works in other countries, like the USA.

Here’s a very simplified idea of how credit scores work in New Zealand. People start with a clean credit report. As long as you keep up good account conduct like repaying your loans on time, paying your bills on time, and so on, then you will maintain this high credit score.

In recent years there has been a small change in the area called ‘positive credit’ (e.g. building credit through getting a credit card). However, this has a very small effect and is a risky idea since any credit score benefits are outweighed by the negative effects of a single missed payment.

Only get a credit card if you need one.

How do lenders consider my credit cards?

This might be more than you think! When calculating how much they are willing to lend you, lenders will look at the full limit of the card, not the balance. In other words, if your credit card has a limit of $5000, but you have only spent $100 on it, the lender will still calculate their total lending offer to you based on the full $5000 amount.

From the lender’s perspective, the total amount of credit that you have access to is more important than how much you are using at any given time. They want to make sure that your loan repayments would still be possible for you to pay back assuming you used the maximum limit of the card.

So in short, even if you are not using the full amount on your card, and always manage your payments on time, the card’s maximum limit could still affect the amount lenders are willing to offer you.

Ok, so how much will a $[amount] credit card limit reduce my borrowing power?

The answer will depend on other factors like how much you earn. But here’s a general rule of thumb to use to estimate the possible effect:
For every $5,000 in credit card limits, the amount that lenders may be willing to offer you could reduce by approximately $25,000.
So a $10,000 credit card limit could reduce your home loan borrowing capacity by around $50,000!

If you do wish to keep your credit card, reducing the available borrowing limit can still have a positive effect.

Wow! So, will closing my credit card get me a bigger home loan?

Often, but not always. Sometimes it’s better to keep a credit card in some circumstances.

Speak to your adviser before making any decisions about whether it’s a good idea to keep or close a card or other lending.