Here's what happened.
I went to a Bank of America location to inquire about mortgage rates. I started talking to a Financial consultant there, about what kind of a rate can I get for a 30 year fixed loan, given that my credit score is 790 and I pay off my credit card bills in full each month.
She started by asking me how much of a credit limit do I have on my credit cards. I told her that my 3 credit cards combined, I have $30000 at my disposal. She then said that to get a better interest rate I should close one or 2 credit card accounts...something about debt to income ratio !!
Everywhere I have read that stop using credit cards but never close credit card accounts!!
Am I wrong here ??
So, to find out more I posed this question to the fine bloggers at the Money Blog Network.
Jeremey at Generation X Finance had this to say:
"They clearly don't understand what a debt-to-income ratio is, since that is how much debt you actually have and are making payments on, relative to your income.
It certainly would not be to your benefit to close an account that has a long history, as credit history does make up a sizable portion of your credit score.
I could see if someone had about 15 credit cards and over $150,000 of available credit may benefit from slimming down the number of cards a bit, but since you already have a high score and a relatively low amount of available credit, there shouldn't be any reason to close a card for a better mortgage rate in your situation."
This is what I thought too, but then Mrs. Micah at Mrs. Micah: Finance and Life had this to say:
"Debt-to-income ratio may not be the right phrase, but this is a normal part of getting a mortgage. I think she meant possible debt-to-income.
It's the amount of credit available that some lenders find worrying. They're taking a risk on you. So if they agree to give you a $100,000 loan but you can also take on another $30,000 of debt, that makes them nervous that you will. Maybe to furnish your new house.
You're a bigger risk than the same person with only $10,000 of available credit. So you'd have a slightly higher interest rate.
In most cases your debt-to-credit ratio is very important. But mortgages are the only time (I know of) when having plain old available credit can hurt you.
Don't close the card but maybe get the credit limits lowered a bit? Perhaps by $5000/card. Tell them it's because you're trying to get a mortgage. This may allow you to get it raised again after the mortgage goes through.
If your annual income is $200,000 or more, this probably wouldn't matter. In theory, such people could handle a mortgage and $30k of credit card debt. I'm not sure how low you can get before it does start to matter. "
So, who is right ??
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7 comments:
Actually, you are both wrong. It IS about how much trouble you COULD get into. But DO NOT CLOSE your accounts. You want to build credit HISTORY. What you should do instead, and it may get some "wha's?" from the credit card companies, is this: Ask for your LIMITS TO BE LOWERED. This way you don't have the opportunity to get into $30,000 in debt. I went about that much after I bought the house. I regret it every day.
Ms. Micah is right, getting the credit limit lowered is the way to go. But (additional info) make sure you get the credit limit lowered on cards that you have very little on the accounts (preferably $0). Banks also look at how close you are to your credit limit.
Yup. I think lowering the credit card limits is the right thing to do. So I did just that. Thanks Telemill.
I kinda agree with Ms. Micah. You can also ask yourself if you really do need a credit limit of 30k p/m. Closing one or lowering the limit might be the way to go. Good luck.
Excellent discussion. My question would be, why would you want/need 30k of available credit? If you don't need it, then I would agree with the point of calling and asking them to cut it in half. My 2 cents. Ooops, I see you already did it!
Hi Kyle,
You are right. I really don't need the 30k credit. Its just that the credit card companies kept increasing my limit without my knowledge and I didn't bother. But after hearing that it could affect my mortgage rate prospects, I had to do something. One phone call to each Credit Card company and now my credit limit is down to 10k now.
So in a way, even though the Bank of America person gave me wrong advice to close my accounts, they at least brought this issue to my notice, so that I could take the right direction.
Lowing the limits sound like a good idea.
Keep it low and under control.
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