Credit cards affecting mortgage limits

Warning: That piece of plastic in your pocket could drop your mortgage borrowing potential by tens of thousands of dollars.

A couple earning $130,000 a year would find their mortgage borrowing power is reduced by $47,000 simply as a result of having a combined $10,000 credit limit on their credit cards, Mike Pero Mortgages found when it surveyed the banks on their lending policies.

Number-crunching by Mike Pero Mortgages found maximum mortgage lending at the banks dropped sharply just as a result of borrowers having a credit card, regardless of whether they ever carried debt on it.

‘‘Many first-home buyers tend to think it’s okay to have credit cards as long as they don’t ever draw down on them,’’ said Mike Pero Mortgages chief executive Mark Collins.

‘‘That’s not how the banks look at it. They have to consider that at any point you could draw down on the full amount, so they look at future potential credit card debt when calculating serviceability, rather than just the amount owing.’’

But though credit cards are practically ubiquitous, financial adviser Liz Koh said some people simply didn’t need one.

‘‘Why would you need one, if you are saving to buy a house?’’ Koh asked.

The argument that it provides emergency access to cash doesn’t hold for these people as they have savings they can draw on in a pinch.

‘‘If you have one, you should choose a low limit,’’ she said.

Collins found that a combined $5000 credit card limit for a couple earning $130,000 would decrease their borrowing power by $28,000.

Double the limit to $10,000, and borrowing would drop by $47,000.

A $15,000 limit would see $80,000 wiped off their borrowing power, and limits of $20,000 would see it drop by $97,000.

Balances on credit cards are believed to have passed $7 billion, having reached $6.98b at the end of October, just before the Christmas shopping frenzy began.

But the combined limits on credit cards for the whole country was $22.9b.

Collins said banks were taking a conservative approach to mortgage lending, and said anyone hoping for a mortgage in the New Year would help their cause by paying off credit cards, and then getting rid of them completely.

Caution was especially needed now, as cards tended to ‘‘get a workout’’ leading up to Christmas and over New Year especially.

Koh encouraged young people to use debit cards instead of credit cards, which means they could continue to shop online when they needed to. She felt many had ended up with credit cards because banks encouraged students to carry them.

But she said whole generations had no access to credit cards in their 20s, proving it was possible to live without them.