Cancelling your credit card

I currently have a credit card with a limit of $38k. The limit has steadily crept up over the years. I rarely have an outstanding balance much greater than $2k and always pay the card off ahead of the 20% interest rate kicking in. A few times a year, the balance balloons (private school fees, land tax), which I pay via credit card as I get the points and always pay off ahead of the interest period kicking in (60 days). In a recent appliation for finance on an investment property, my broker suggested I simply cancel the card or reduce the limit to $3k to improve serviceability. Unfortunately, my current card has a minimum limit of $17k so would need to cancel the current one and apply for a new card (has quite good rewards points). I always suggest serviceability should be based on total interest paid (zero) as I largely just use it as a convenient charge card, but those are the bank rules re serviceability and you aren’t going to change them in a hurry. Interested in the views of brokers on the forum. Are clients regularly cancelling or reducing credit cards to improve serviceability. I know you can go to a debit card, but some hotels and car hire companies will not accept those as a security deposit. Interested in getting the views of the forum.

 

Not cancelling but often reducing limits. Credit card limits can make a material difference to serviceability and in many cases the client does not require a limit that high.
Sometimes part of the qualification of an approval is that the bank will ask the client to reduce their credit card limit.
But technically nothing to stop the client doing what they want post settlement. Likewise with many other forms of unsecured debt....

 

Yes many cancelling and many reducing limits.
A $30k credit card would reduce your borrowing power about $120k

 

Yes, that happened to me as well. Does not make a lot of sense. Thanks for the response.

 

Thanks for the response. That raises another issue that has always niggled at me. I assume the banks serviceability check at the time of loan application is merely a snapshot in time. Once the loan is funded (let’s say with your commitments being 35% of your income), there is nothing stopping you from borrowing more from another bank down the track so that your serviceability Calc moves to 45%. In other words, there is nothing in a standard residential loan contract that requires you to maintain certain serviceability metrics for the life of the loan. Such requirements are quite common with large corporate loans (talking large listed companies now) where the financier will take no security over any assets but the company will pledge (I think it is called negative pledge) not to gear above certain levels and pledge assets as security to other lenders.

 

And some have told me they cancel their credit cards, but the card provider asks them to ring up after the loans settle and they can reinstate the card and its limit.

 

There are limitations depending on what debt you're taking out as to how your serviceability is assessed. You're right though, there is nothing to stop someone who has just maximized their borrowing capacity with an investment purchase to go out and buy a car completely on credit. It'll be problematic for them if they need to refinance that property down the track though (or anything that'll require a full assessment).

 

In general, more and more borrowers are 'cleaning up' their finances to improve borrowing power. There's less of a servicing margin to play with today, so things like reducing limits, removing small personal debts, etc are becoming more common.

 

yep we were made to reduce limits on all credit cards before our most recent loan was approved

 

"I know you can go to a debit card, but some hotels and car hire companies will not accept those as a security deposit. Interested in getting the views of the forum."

I've never had an issue with this- through many hire companies and hotels, worldwide.

 

Very common - with more borrowers finding their capacity to borrow constrained, every low hanging fruit which can be targeted to increase borrowing capacity is being utilised. Credit cards, paying out personal loans and even HECS/HELP debts are becoming common requests to be able to get a deal over the line for clients.

 

how does that work, I would have thought it is 1 to 1? does it take into account interest rates or something?

 

Wow, that's a news for me.

 

If you borrow $30,000 then the minimum repayments would be about $900 per month. Most lenders go off 3% pm.

 

At the stage where I am thinking of making a voluntary payment to get rid of my HECS debt because it's providing an hindrance in me going forward. Yes, majority of people in the population will tell you to leave it as it's the best form of debt to have, but we are not 'normal' people in society that need to conform to that view.

 

Credit cards have a higher repayment amount required per dollar borrowed than a 30 year home loan - so it is seen as a significantly higher cash flow drain.

 

Do all banks take into account the credit card limits ?
The reason why is the NAB did not discuss this matter at all on my last loan
OR do they only bring this issue up if you are close to the limit of borrowing
Ps I have a $300k limit ...frequently used to the limit but always fully paid on due date

 

Wow, how did you manage to get a $300k credit card limit? Just curious!