How Credit Cards Can Impact Your Borrowing Power

In the world of finance, credit cards are a bit like a double-edged sword. 

While they offer convenience and can help in building credit, they also have a significant impact on your borrowing power. 

This is a critical consideration for anyone looking to secure a loan, be it for a home, car, or personal use. 

Let’s unpack how credit cards influence your loan eligibility and what you can do to manage this impact effectively.

The Influence of Credit Cards on Loan Approval 

Credit Utilisation Ratio: One key factor lenders look at is your credit utilisation ratio. 

This is the amount of credit you're using compared to your total credit limit. 

A high ratio can indicate that you're over-reliant on credit, which can be a red flag for lenders. 

It suggests a higher risk of default, and as a result, can lower your borrowing power.

Impact on Credit Score: Your credit card habits play a significant role in determining your credit score. 

Consistently carrying high balances, making late payments, or maxing out your credit cards can negatively impact your score. 

Since lenders use this score to assess your creditworthiness, a lower score can mean higher interest rates or even loan denials.

Debt-to-Income Ratio: When applying for a loan, lenders evaluate your debt-to-income ratio. 

This ratio compares your monthly debt obligations (including credit card debts) to your income. 

A high debt-to-income ratio can limit the amount you're eligible to borrow, as it indicates a large portion of your income is already tied up in debt repayments.

Financial History and Habits: Your credit history, which includes your credit card usage, gives lenders insight into your financial habits.  

Responsible use of credit cards, such as timely payments and keeping balances low, can strengthen your loan application. 

Conversely, a history of missed payments or defaults can hurt it.

Strategies for Maintaining Healthy Credit

Timely Payments: Always clear your visa card balance at the end of the month. If you can't do this then this is a strong indication that your credit card limit is too high and you are living beyond your means.

Always make sure you pay the maximum amount due on your credit cards before the due date. Timely payments are crucial for maintaining a good credit score.

Manage Balances: Keep your credit card balances well below the limits. A good rule of thumb is to use less than 30% of your available credit.

Also, be conscious of keeping your total limit low instead of having the large limit for a 'rainy day' as this will impact the amount banks will lend to you.

Regular Credit Monitoring: Keep an eye on your credit score and report. Regular checks can help you spot and address any errors or fraudulent activities that may impact your score.

You can do this easily by signing up for credit alerts by companies such as 'Veda'

Be Cautious with New Credit: While it can be tempting to open new credit card accounts, doing so can temporarily lower your credit score.

Frequent applications for new credit can signal financial instability to lenders.

Credit cards are powerful financial tools that can have a significant impact on your borrowing power.  Banks will assess you at the maximum limit, even if there is no balance on the account.

By understanding this impact and managing your credit responsibly, you can maintain a strong financial position and improve your chances of loan approval when you need it.