Credit Cards: The Good News and the Bad News

Being February, you might be feeling a little apprehensive about your next credit card statement that likely holds a record of all the fun we had over the holidays.

Even so, it is worth spending a few minutes thinking about credit cards as there have been a lot of changes around recently, including how they could affect a home loan application.

Credit card application pain

New regulations effective on 1st January mean that credit cards will be harder to get. In the past providers assessed affordability based on the minimum monthly repayment. Now they need to assess it based on the borrower being able to afford monthly repayments based on the full limit over 3 years. This calculation will also apply to any future increases of the limit. In many ways this is a very positive change. My personal view is that a credit card should be paid off in full on the last calendar day of every month, or preferably not used at all.  However in applying for a card there are lots of other buffers applied which, combined with these changes, could make credit cards very hard to get.

Flow on pain to home loan applications

Similar changes to calculating notional repayments on existing cards are being applied to home loan applications, even if you pay the card off in full every month. High limits on credit cards will now reduce your home loan borrowing capacity by more than they did before. If you have a limit you don’t need, seek advice.

There is some good news though…

Credit card providers must now give you the option to reduce your credit limit or cancel the card online. This will make it easier to make the changes you may need in order to support your home loan application.

In another win, lenders are no longer allowed to back date interest to the date of purchase. They can only charge interest from the date the payment was due. That said, paying it off in full is still the best option.

Being banks, they will still want to try to claw back this lost profit in other ways. In light of this change, I’d recommend keeping a careful eye out for any changes your credit card provider may make to the interest free period on your card or other terms and conditions.

Why do I suggest paying your card off in full on the last calendar day of every month?

A 55 day interest free period seems like a generous offer, in reality it makes it really hard to track how much you’re spending. If you pay it off in full on the last day of the month, it will give you a feel for whether you’re keeping a lid on things or whether you need to pull back a little in the coming month.

Credit card providers also tend to move the repayment date around, because of weekends and public holidays. Or so they say… In reality, having a date that moves around a bit works for them: It makes it trickier to pay your card on time which can lead to late fees and interest. Paying it on the last day of the month means this won’t happen.