RISKY BUSINESS: HOW DO BANKS VIEW YOU?

Recently, I have noticed a trend amongst clients who have unnecessarily high credit card limits.

Generally, the banks offer the credit card limit increases and we accept the increases each time they are offered, ‘just in case’.

Some clients will say things like “I‘ve got a $20,000 limit on my AMEX but I only spend $1,000 on it a month and pay it off in full each month”, thinking it's not a big deal. Whilst, it’s great that they pay it off each month and therefore pay zero interest and fees, but banks generally don’t care. The banks see the card as a $20,000 liability and in their eyes, that card is already maxed out because it could be with 5 minutes of online shopping.

A $20,000 Credit Card limit, even if paid in full each month, will lower you borrowing capacity with many banks by about $100,000

Meaning you may not be able to get the loan you want for your next big purchase. However, if you stick to the following guidelines, banks won’t see you as a ‘risky proposition’ and you will maximize your borrowing potential:

  1. If you can’t pay off the complete balance every month (so you pay no interest) or you have an ongoing credit card debt that you are paying interest on month after month you need to change this RIGHT NOW.  A finance broker can present a number of options that may fix these issues and usually a solution can be found to leave you with more money in your pocket each month.
     
  2. Keep your Credit Card limit to the absolute lowest possible. For example, if you have $5,000 worth of monthly expenses that you plan to use your credit card to pay for (and of course pay this balance in full on the due date) then why have a credit card limit of $20,000? A limit of $6,000 should be enough.
     
  3. Don’t automatically take up the limit increases that a bank offers you because you are such a ‘valued customer’.
     
  4. A DEBIT CARD may be a better option if you are not sure if you will be able to control those impulse purchases. A debit card can be used just like a credit card but you are only using your money to pay for things.
     
  5. If you don’t have the money in a bank account to pay off your total credit card limit at any time, a financial restructure may be the best decision you can make right now.

If you would like further information on how banks view you and how to maximize your borrowing capacity even further, give me a call and let’s chat.

Michael