In short: Lenders assess a credit card at a percentage of its limit, commonly around 3.8% a month, regardless of what you owe. That turns a $10,000 limit into a $380 monthly commitment and removes roughly $47,000 of borrowing power at a 9% assessment rate. A $30,000 limit removes about $142,000. Cancelling or reducing limits before you apply is the cheapest fix in home lending.
Key takeaways
- The card's limit is what counts, not the balance, because you could max it out the day after settlement.
- A common rule of thumb is 3.8% of the limit per month, though lenders vary between about 3% and 4%.
- Every $100 of assessed monthly commitment costs roughly $12,400 of borrowing power at a 9% assessment rate.
- Buy-now-pay-later accounts are treated as liabilities or expenses, and lenders read the statements.
- Reduce or close cards before pre-approval; a cancellation letter from the card issuer is usually needed.
Of all the things that quietly shrink a home loan, credit card limits are the most avoidable. Clients arrive with a card they have not used in two years, still carrying a $15,000 limit because the bank kept offering increases, and cannot understand why their borrowing figure is $70,000 short of what they expected. This post shows the arithmetic and how to fix it in a week.
Why the limit counts and not the balance
When a credit officer assesses a file, they are asking what you could owe, not what you owe today. A credit card is an open line of credit. Nothing stops you drawing the full limit next month, so the lender assumes you might, and applies a repayment on that possibility. The rule of thumb across the industry is about 3.8% of the limit per month, which is roughly what a minimum repayment on a fully drawn card would be. Some lenders use 3%, some 4%. The exact percentage matters less than the principle: the limit is a liability.
This is why "I pay it off in full every month" does not help you. The assessor believes you, and it changes nothing in the calculation.
The arithmetic
At an assessment rate of 9.00% (for illustration, a 6.00% loan plus the 3 percentage point buffer) on a 30-year term, each $1 of monthly commitment supports about $124 of loan. So:
| Total card limits | Assessed monthly commitment (3.8%) | Approximate borrowing power lost |
|---|---|---|
| $5,000 | $190 | $24,000 |
| $10,000 | $380 | $47,000 |
| $15,000 | $570 | $71,000 |
| $20,000 | $760 | $94,000 |
| $30,000 | $1,140 | $142,000 |
| $50,000 | $1,900 | $236,000 |
Run your own numbers in the borrowing power calculator with and without the cards, and the difference will be close to this table.
Worked example: a single buyer on $100,000
From our post on borrowing power by salary, a single on $100,000 with no debts and modest expenses borrows around $504,000 on illustrative assumptions. Now add two cards: a $15,000 rewards card and a $10,000 store card kept "for emergencies". Total limits $25,000, assessed at $950 a month, borrowing power falls by about $118,000 to roughly $386,000.
In Epping or Lalor that is the difference between a house and a unit. Closing both cards restores the full $504,000. If the buyer wants to keep one card, reducing it to a $3,000 limit costs about $14,000 of capacity, a reasonable price for having a card in the wallet.
Buy-now-pay-later and other small credit
BNPL accounts are treated inconsistently across lenders, which is itself a reason for caution. Some treat the account limit like a credit card. Some ignore the facility if there is no balance. All of them see the transactions on your bank statements, and a pattern of BNPL instalments for clothing and electronics tells the assessor something about spending habits that a clean statement does not.
The same applies to store finance, interest-free furniture deals and small personal loans. Individually they are trivial; together they are a set of monthly commitments and a story. Close what you do not need and let statements run clean for three months before you apply. Our guide to credit scores and home loans explains what else the assessor reads on your file.
The fix, step by step
- List every card and its limit, including ones you have not used in years. Check your credit report (MoneySmart shows how to get it free), because a forgotten card will be on it.
- Decide what you actually need. One card with a modest limit is plenty for most households.
- Reduce limits first if you want to keep a card. Most banks let you lower a limit in the app instantly.
- Close the rest and request written confirmation. Lenders often want a closure letter or a statement showing a nil balance and closed status, because the credit report can take weeks to update.
- Pay out small loans if you can. A $4,000 personal loan with $300 monthly repayments costs about $37,000 of borrowing power; clearing it from savings may be worth more than the savings themselves.
- Wait for the statements to reflect it, then apply for pre-approval.
If you have several debts and cannot pay them out, debt consolidation into one lower-rate facility can reduce the total monthly commitment the lender assesses; the debt consolidation calculator shows the effect. Just be aware that rolling debt into a home loan spreads it over 30 years, so it costs more overall unless you pay it down quickly.
Timing: before, not after, pre-approval
Lenders re-check your liabilities at formal approval, so a card opened or a limit increased between pre-approval and settlement can undo an approval. Equally, closing cards after pre-approval does not automatically lift the figure; you need to tell the lender so they can reassess. The clean sequence is: reduce debts, wait a statement cycle, apply, and then change nothing until the keys are in your hand. If you buy at auction, where there is no cooling-off, a change in your liabilities between the hammer and settlement is a genuine risk to the whole purchase, and what happens if finance falls through is unpleasant reading.
For the regulator's plain-English view of how lenders assess credit cards and why limits matter, see MoneySmart on credit cards.
Frequently asked questions
Should I cancel all my credit cards before applying for a home loan?
Not necessarily all. One card with a low limit, say $2,000 to $5,000, costs little borrowing power and can be useful for travel or emergencies. Cancel or reduce the rest. If you are close to the borrowing figure you need, cancelling everything and reapplying for a card after settlement is a legitimate strategy.
Does cancelling a credit card hurt my credit score?
Closing accounts you do not use generally has a minor effect, and a lower total credit limit is viewed favourably by home loan assessors. Opening new credit shortly before a home loan application is far more damaging than closing old accounts. Keep the account you have held longest if you want to preserve credit history.
How long after closing a card can I apply?
Once you have written confirmation of closure you can apply immediately; the lender will accept the letter even if the credit report has not updated. Without the letter, expect the assessor to keep counting the limit until the report reflects the closure, which can take a month or more.
Does a HECS debt count the same way as a credit card?
No. HECS-HELP is repaid as a percentage of your income through tax, so lenders reduce your net income by that amount rather than assessing a limit. The effect on borrowing power is real but different, and we cover it in how to improve your borrowing power.
Talk to GNT Finance
Bring us your cards and we will tell you exactly what each one is costing you and which to close before you apply. Book a free consultation or call Gorakh Timilsina on 0426 403 703 from our Mickleham office. There is no cost to you for our home-loan service in most cases.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.