Credit cards can cost you your loan

January 18, 2019

 

In general terms, there are two types of people that use credit cards: the Transactors and the Revolvers. 

 

The Transactors use their card to buy everything and then pay the card balance in full at the end of each and every month. If they're smart, a Transactor rarely pays anything for using their card. Revolvers rarely manage to pay of their debt in full and roll their debt over into the next month, like a revolving line of credit. As a result, they pay interest each month.

 

Credit card interest rates are very high in comparison to other sources of debt so banks make a lot of margin from people who carry debt from month to month. With the exception of maybe an annual fee, all those reward points that Transactors earn are paid for by the Revolvers. 

 

Having inflated credit card debt is seriously bad for your financial well-being. Several credit cards with interest rates of 13 to 20 per cent are difficult to manage and limit your potential to borrow. Even when your cards are paid off each month, banks still assume the total value of your card limits when calculating what you can actually afford to borrow. Why do they do this? Because your could use all the debt on your credit card the day after they approve your loan so they have to assume the worst. That debt can substantially reduce the amount of money you can borrow. 

 

If you have large credit card limits and don't need or use them it makes a lot of sense to have them closed, it can be the difference between having the loan amount you need approved or declined. 

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