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     | Friday, November 19, 1999 - 07:32 am  I read the boards posted by the actual credit reporting agencies and I am confused by what appears to be an inconsistency. One board stated that it brings the score down when consumers apply for those store credit cards just to get that 10% off coupon, and then never use the card. I accept the reasoning. To badly paraphrase: too many cards with available credit indicate to potential future creditors that the consumer has rope to hang himself with - he has a lot of available credit to get in trouble with. Maybe FICO feels that the consumer has room to go on a spending spree in anticipation of filing bankruptcy? I'm guessing. But I have also read that it increases the FICO score when the ratio of credit-actually-used to credit-limit-available is low. I also accept the stated reasoning for this. To paraphrase: it shows self control. So then it's good to have a lot of credit available on the cards. But doesn't the same thing that shows self-control also indicate that the consumer has available credit with which to easily get in trouble. Am I misunderstanding one of these two FICO factors?? I don't know whether to recommend reducing credit limits or to increase them. Any opinions?
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| | Friday, November 19, 1999 - 10:42 am It is true that traditional underwriting methods considered too much available credit to be a problem. The theory (plausible enough) was that a person with a lot of credit could get themselves into trouble someday by going on a spending spree and getting out of control. Under this theory a person with a $100,000 home equity line of credit (HELOC) on which he owes nothing on a $150,000 home was as large a risk as a person with a $100,000 deed of trust on a $150,000 home under the theory that the first person MIGHT one day encumber themselves with as much debt as the person currently encumbered by the first trust deed. In practice, however, that isn't the case and the FICO models do not have rejection codes for too much available credit. There is no known statistical correlation between having a lot of credit and delinquency. As for someone who opens a credit card and never uses it you must understand the method that credit reporting agencies use to record payment history. Although each agency is a little different, I am taking an example from the Experian method because that's the one I'm most familiar with. A person's payment history consists of up to 99 entries showing how they paid in the past and they are rated C, N or 0-9. C is the most desirable showing that a payment was owing and that the payment was received on time. 0 is less desirable showing that no payment was required and none received. N is less desirable showing that no update was received from the creditor and that, for all anyone knows, you may have paid or may be delinquent. 1 shows a payment was owing and not received (late 30 days) 2 shows late 60 3 shows late 90 4 shows 120+ late 5 shows current/paid but was referred to collection (paid collection) 6 is normally unused but sometimes shows 180+ late 7 shows paying under a wage-earner plan such as the ones worked out in lieu of bankruptcy (like CCCS plans) 8 shows repossession or foreclosure 9 shows charge off or delinquent collection acct So the goal is to have all your tradelines show a solid line of C's meaning that you had a payment due and you faithfully made that payment. When you open an account and never use it you end up with a solid line of 0's which means no payment was owing. Although this is not negative it's not exactly positive either. No one can figure out how you will handle being required to make payments from looking at a history that shows you weren't required to make payments. This is why some mortgage broker's recommendation that you obtain a secured credit card, charge one thing on it and pay it off then don't even use the card for several months isn't the best plan. You should keep small balances on the card so that you'll have payments coming due, then make those payments in a timely manner and pay all your cards off 60 days prior to applying for that loan you need.
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| | Monday, November 22, 1999 - 08:54 am Actually, your debt ratios are one of the most important factors used to calculate your score. Lots of my readers (www.creditinfocenter.com) have complained that while they have perfect credit, they have been turned down because of "available credit". If you have 5 credit cards with a total of $5,000 available and you only have a total $500 left on all your cards, this is a red flag. This only applies to revolving lines of credit, not mortgages or cars, for example. How much available should be left? Lenders like to see less than 20%. However, this varies with the number of cards you have and total amount available. Having too many cards is a red flag, and having too much available credit (even if your debt ratios are low) CAN BE negative as well. Unfortunately, you just have to use your common sense. Another example of how nice it would be to know how your credit score is calculated.
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| | Monday, November 22, 1999 - 10:03 am Kristi, can you explain away the inconsistency created if FICO considers both too much available credit and too high a ratio of debt to credit available. I set forth the question and the apparent inconsistency more clearly in the initial post. This issue exemplifies that fact that everyone has an opinion. I cannot get a solid answer. I thought that Sean's made sense, but I don't know. I am willing to adopt anyone's post as my own and start giving out that information to my clients, but it would help if someone would cite an authority or give a reason - a theory that supports FICO's use of the information.
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| | Monday, November 22, 1999 - 12:55 pm Voigtkampff: If you haven't already visited this site (http://www.bankrate.com/brm/news/pf/19981204b.asp) then I suggest you do. Perhaps you should even print it out and give it to your clients.
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| | Monday, November 22, 1999 - 06:54 pm I can't explain the inconsistency of when exactly is the right amount of available credit, or how many credit cards is just the right amount. When I was a mortgage banker and when I was a loan officer, I would hear all the time from underwriters: "the consumer can just charge up their cards". And then another file would come in and they would turn it down because they had no available credit left. Another one would be turned down when they had 5 open revolving lines, and half the available credit would be available. It doesn't make any "sense" to me that's what kills me about credit scoring. I agree, it's highly inconsistent, like there'e some bar graph and a point where all the data converges. I did loans before credit scoring was so widely used (only 6 years ago!) and underwriters made the decisions.
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