Avoiding The Credit Card Trap

Have any of your mates ever told you that before you can apply for your first home loan, you need to get a credit card to open your credit file and show you can repay a debt?

If I had a dollar for every time I heard that, we would have purchased our first home earlier. If everyone is saying it, then it must be true, right?

The short answer is no, it’s not true. Although getting a credit card does open your credit file, it is not essential to show a bank that you can repay a debt before they will provide a home loan for you.

In fact, getting a credit card at such a young age can create the illusion of wealth and lead to further problems with your spending habits, which can make it harder to get a home loan.

People tend to justify the need for a credit card in many ways. It’s a ”just in case something happens” emergency card or an “I only use it when I travel” situation.

The whole credit card system is built on the buy now and pay later world that we live in. The banks love it when we use our credit cards, because they can immediately start charging us interest up to 18% per annum, or even higher in some cases.

Rather than relying on a credit card to manage your lifestyle, I believe everyone should learn the art of money management and the ability to save for those big purchases we want to make from a young age. It’s far more rewarding to structure your finances so that when something unexpected does pop up, there is a buffer in your account to cover it. It can take time to build your buffer but avoiding a debt trap early in life means we can make those purchases without that sinking feeling a high interest credit card can give you.

Getting your spending habits under control is so important, especially before you enter the world of home loan debt.

Did you know that when you apply for a home loan, the lender will take the full credit card limit as a debt and it will reduce your borrowing capacity? They will also review your spending on the credit card and if there are any late payments or irregular spending, it will impact your chance of getting your loan approved.

Remember we can’t change the past, but we can control what happens moving forward.  

If you have got a credit card debt and need guidance to help pay it down, we can provide strategies to manage your cash flow and get your debts under control. It will take some discipline and hard work, but once you achieve the goal of clearing your credit card debt, it will be so liberating!