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Have you ever wondered why your bank might require you to lower your credit card limit and closing your buy now, pay later (BNPL) accounts like Afterpay and Laybuy? In this article, we delve into the reasons behind this recommendation and shed light on its impact on your financial journey, particularly when applying for a home loan.
Credit cards and BNPL schemes undoubtedly offer convenience and perks for everyday transactions, but it’s crucial to recognize that financial institutions view these as liabilities. This perspective can significantly influence the amount you’re eligible to borrow when seeking a home loan.
The dilemma arises for those who manage their credit cards and BNPL accounts responsibly – paying off balances monthly and avoiding interest charges. Despite these sound financial practices, banks still perceive the full credit card limit and active BNPL accounts as potential liabilities. This directly influences the serviceability assessment, a pivotal factor in mortgage approval.
While maintaining higher credit card limits and open BNPL accounts might provide a sense of security, it’s essential to realise that this can lead to unintended consequences when applying for a home loan. The seemingly unused credit cushion could actually hinder your borrowing capacity and result in unfavorable loan terms.
In many instances, lenders or your mortgage advisor will recommend either reducing your credit card limit or closing certain BNPL accounts. However, it’s essential to know that you’re not obligated to adhere to these suggestions. The decision to lower limits or close accounts should be aligned with your financial strategy and long-term goals.
Your credit card limit isn’t a fixed thing, and BNPL accounts can be managed based on your requirements. Once your home loan is secured, you can reconsider utilising these options as needed.
In conclusion, the relationship between credit limits, buy now pay later accounts, and mortgage applications is a complicated one. It’s essential to strike a balance between leveraging credit for convenience and ensuring that your financial decisions align with your home ownership aspirations.
