Why Add-On Credit Cards May Impact Your Borrowing Capacity

Add-on credit cards allow a primary cardholder to share a single credit limit with another person, such as a spouse, child, or parent. While the add-on user gets a separate card, the bank treats the account as one. The repayment responsibility and ownership stay entirely with the primary cardholder.

These cards are normally provided at no extra cost, making them appear impact less on your credit health. However, their impact becomes visible when a borrower applies for a loan.

Impact Of Add-On Cards On Credit Assessment

From the lender's perspective, an add-on card does not split credit exposure. The entire credit limit is counted against the main holder. Each and every spending, even if it is not done by the primary cardholder, adds to the singular outstanding balance.

When banks assess loans, the entire unsecured exposure is taken into account. This will also involve credit card limits and not merely dues. For instance, if a card has a limit of Rs 5 lakhs, it will be considered as an exposure of Rs 5 lakhs, irrespective of how much is normally incurred.

Credit Utilisation And Lending Approval

Credit utilisation ratio is a crucial metric used by lenders. It calculates the amount used out of the available limits. A ratio of over 30 to 40 per cent is often seen as aggressive.

Add-on cards can accelerate this process. If there are multiple users, the credit utilisation ratio may exceed 50 per cent even if the payment is made on time. This is important because high utilisation can signal stress on cash flow.

When banks price loans, higher perceived risk usually leads to higher interest rates. For example, home loan interest rates for individuals with lower utilisation and unsecured credits may begin at around 7.10 per cent, but the rate may go up to 9.25 per cent and above for those with higher utilisation and unsecured exposure. On personal loans, the spread can be substantial for those with higher utilisation, between 14 per cent and 36 per cent per annum and above, depending on the credit profile.

Impact On Debt-To-Income Calculation

Banks also assign a notional monthly obligation to credit cards. A common practice is to assume 3 to 5 per cent of the total credit card limit for calculating the monthly charge, irrespective of the amount spent on it.

If a borrower has a combined credit limit of Rs 6 lakh, lenders may assume a monthly obligation of Rs 18,000 to Rs 30,000. Add-on cards increase this assumed liability without increasing income, which directly reduces loan eligibility.

This becomes especially relevant for home loans, where lenders typically allow total monthly obligations to stay within 40 to 50 per cent of income.

Repayment Risks And Credit History

All repayment obligations pertaining to the use of add-on cards rest with the principal cardholder. In cases where the add-on cardholder postpones reporting expenses, leading to late payment of the bill, the negative mark is recorded only against the principal cardholder.

Late payments on credit cards can decrease credit scores and be reflected on credit history for several years. This may cause an increase in future borrowing interest rates.

Impact on Big-Ticket Loans

The impact of add-on credit cards is particularly relevant in the case of acquiring a big-ticket loan, such as a home loan or an education loan, as lenders scrutinise unsecured exposures very carefully while approving such loans.

In some cases, borrowers are requested to pay off existing loans and reduce utilisation before acquiring a new loan. Also, banks may direct borrowers to close add-on cards entirely.

Add-on cards do not create a visible warning on the monthly statements about their impact on the borrowing capacity. The effect shows up only during credit assessments.