Preparing financially
How existing debt affects your borrowing capacity
Personal loans, car loans and unused credit limits all reduce what a lender will approve — often by more than the actual balance owing.
- Credit card limits are commonly assessed at their full available limit, not the current balance.
- Formally reducing credit limits (not just leaving them unused) can materially change borrowing capacity.
- Clearing revolving credit tends to help loan approval most; clearing the highest-rate debt first is usually cheapest — the two aren't always the same priority.
Why debt reduces borrowing capacity, not just cash flow
Personal loans, car loans and even unused credit card limits are generally counted against your borrowing capacity — for credit cards, lenders commonly assess the full available limit as if it were drawn down, not just your current balance. Paying off or closing debts (and formally reducing credit limits, not just leaving them unused) before applying can materially change what a lender will approve.
Prioritising which debt to clear first
From a pure home-loan-approval perspective, reducing revolving credit limits (credit cards, personal lines of credit) tends to have an outsized effect compared with a similar-sized fixed loan, because of how the full limit is counted. From a pure interest-cost perspective, clearing the highest-rate debt first is generally cheapest. These two goals don't always point the same way — worth discussing with a broker or financial counsellor if you're deciding between them.
Practical checklist
Before applying with existing debt
- List every existing debt and unused credit limit, not just active balances
- Consider formally reducing or closing unused credit limits before applying
- Ask your lender exactly how they treat each type of existing debt
Relevant Delora tool
Questions for a professional
- How exactly do you treat my credit card limits versus my actual balances?
- Would closing this account meaningfully change what you'd approve?