How credit cards, Afterpay and car loans affect what you can borrow
Banks don’t assess your debts on what you pay each month. They assess them on what you could be made to pay. That one difference explains most of the confusing advice out there about what to clear before you apply.
An unused credit card with a 10,000 dollar limit costs you nothing. To a bank it’s a monthly commitment of roughly 3% of the limit, so about 300 dollars a month on that card, for as long as you hold it. Take a couple with two 8,000 dollar cards they never touch: that’s several hundred dollars a month of servicing gone before anyone looks at the mortgage.
So yes, credit cards, Afterpay and car loans all affect what you can borrow, just not equally. The quick version: cut the card limits you don’t use, close buy now pay later accounts, clear car and personal loans if you can do it without gutting your deposit, and usually leave the student loan alone.
What each type of debt does to you
| Debt | How banks treat it | Worth clearing first? |
|---|---|---|
| Credit card | A percentage of the limit, not the balance | Reducing the limit usually works as well as closing it, and it’s quicker |
| Buy now pay later | Varies by lender, but recent use reads as budget pressure either way | Yes, and close the account, don’t just clear it |
| Personal or car loan | The actual repayment, until the term ends | Usually the biggest impact per dollar repaid |
| Student loan | The 12% repayment on income above the threshold | Rarely worth clearing early |
| Hire purchase and Q Card | Same as a personal loan, often at a worse rate | Yes |
| IRD arrangement | The actual repayment, and it raises questions about how you manage money | Clear it or have the arrangement documented |
Credit cards: the limit counts, not the balance
When a lender assesses your application it looks at your total commitments. That means what you could owe as well as what you owe today, and with a credit card, what you could owe is the limit. Most lenders assume you could run the card up at any time and count a percentage of the limit as a monthly repayment, even when the balance is zero. Around 3% is common, and some lenders use more.
That’s why cards have quietly dragged down borrowing power for years. You can have good credit, a steady income and no real debt, and a few unused high-limit cards can still take tens of thousands of dollars off what you can borrow.
I often get asked whether a card you clear every month gets treated differently. Some people have heard that a lender will ignore it. I haven’t been able to confirm that as a current published policy at any lender, so I plan on the basis that the limit counts, and I check the lender’s policy case by case.
What to do with your cards before you apply
- Check your limits, and lower any you never use in full.
- Pay the cards you keep in full every month, so your statements show a card that’s managed, not relied on.
- Get written confirmation from the bank when you reduce or close a limit, so your adviser can show the lender.
- Don’t open new credit, and that includes store cards and buy now pay later.
The student loan question, answered properly
This comes up all the time and usually gets answered badly. A student loan isn’t treated like other debt. It’s interest-free while you live in New Zealand, and the repayment is 12% of every dollar you earn over the repayment threshold, which is $24,128 a year and has been frozen at that level. So it behaves more like a tax than a loan.
Someone with a 2,000 dollar balance finishing in December and someone with a 16,000 dollar balance get treated almost the same by the servicing calculation.
Paying 16,000 dollars off a student loan to lift your borrowing power is usually a bad trade. That 16,000 does far more work sitting in your deposit than the small servicing improvement you’d get.
The one twist is income. Because the repayment rises as you earn more, a higher earner can have a big monthly student loan deduction, and sometimes restructuring it changes the picture. I cover that, with a real example, in does a student loan affect getting a mortgage.
The car loan question, answered properly
This one’s the opposite. A 26,000 dollar car loan with three years to run is a real repayment going out every month, and it eats into servicing directly. If you can clear it without gutting your deposit, it typically lifts your borrowing by a lot more than the amount you paid off.
The awkward version comes up constantly: someone has 20,000 saved and a 20,000 car loan. Pay off the loan and you’ve got no deposit. Keep the loan and you can’t service the mortgage. Honestly, there usually isn’t a clever way out of that one, and the right order depends on how far off a 5% or 10% deposit you are. I’d model both before deciding.
That car loan versus deposit trade-off is worth modelling properly rather than guessing. I’ll run both versions for you.
Model both scenarios →Buy now pay later deserves its own section
People tend to assume Afterpay and Zip are invisible to a lender. They’re not. Your recent bank statements go to the lender, usually the last three months, and a fortnightly pattern of instalments is obvious.
Some lenders treat it as a commitment. Others read it as a sign that day-to-day spending is tight. Neither helps you.
It’s also no longer unregulated. Buy now pay later has been covered by the Credit Contracts and Consumer Finance Act since 2 September 2024, so providers run a credit check when you sign up (MBIE). And it’s where repayment stress shows early: credit bureau Centrix reported buy now pay later arrears at 9.5% in its March 2026 report, the fifth monthly rise in a row (Centrix Credit Indicator, March 2026). Lenders read those numbers too.
Close the accounts rather than just clearing them, and do it at least three months before you apply so your statements are clean.
Applying early in the new year? Christmas is on the statements the lender reads. See Christmas spending and your mortgage application.
Does closing a credit card hurt my credit score?
Slightly, sometimes, and it matters much less than people fear. In New Zealand a mortgage decision turns on servicing and on how you’ve handled credit, not on a score by itself. What a lender wants to see is a clean record: no missed payments, no defaults and no recent enquiries.
One person I spoke to had a score of 771 out of 1,000 and was still worried about it. That score was never the issue in their application.
Defaults are the exception. An unpaid default of any size is a live problem, and in my experience a sizeable one, say 10,000 dollars, will stop most main bank applications until it’s resolved. Deal with defaults first, before anything else on this page. If one is already on your file, my bad credit options page covers what’s still possible, and if you’ve already been turned down, home loan declined walks through what usually caused it.
A sensible order of operations, six months out
Planning to buy early next year? Then six months out is roughly now, and your December and January statements will sit inside the three months the lender reads. Christmas is the easiest time to undo this list without noticing.
- Close every buy now pay later account.
- Reduce credit card limits to what you really use, or close the cards. Pay any card you keep in full each month.
- Clear or resolve any default, and get confirmation in writing.
- Clear short-term, high-repayment debt, starting with car and personal loans.
- Leave the student loan alone unless we’ve modelled a better option for your income.
- Stop applying for anything new, including a phone on a plan.
To see roughly where that leaves you, run the numbers in the mortgage calculators.
Common questions
Does an unused credit card affect how much I can borrow?
Is reducing my card limit as good as closing the card?
Will the bank know if I close my Afterpay account the week before applying?
Can I get a mortgage with a default?
Does a car on hire purchase count differently from a car loan?
Should I consolidate my debts before applying?
Not sure which of your debts is costing you the most borrowing power? Send me the list and I’ll show you what clearing each one would do.
Book a free chat → Contact meWhere these rules come from
Where a rule on this page is set by the government or a regulator, check the current position at the source, because the numbers can change.
- Inland Revenue, student loan repayment threshold and rate
- MBIE, buy now pay later and the CCCFA
- Centrix Credit Indicator, March 2026
- Reserve Bank of New Zealand, debt-to-income restrictions
Read next
How much can I borrow
The full servicing calculation these debts feed into.
Using KiwiSaver for your first home
Where the deposit side of the equation comes from.
Debt consolidation
When rolling debt into a mortgage helps, and when it quietly costs more.
First home buyers
The full guide, from the first conversation to getting the keys.
Student loans and your mortgage
How the income-based repayment is counted, and when restructuring it helps.
This article is general information only and is not personalised financial advice. Lending criteria, lender policies and Reserve Bank settings change regularly. Speak with a mortgage adviser about your own situation. Our Disclosure Statement is available on request and free of charge.
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