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     | Sunday, November 28, 1999 - 09:07 pm  I had posted previously a question as to whether it was better to have a few high balances or several low balances in an effort to find the best strategy to paying off my cards before attempting to buy a car. One of the responses elicited a a line to the effect of, "Balances of $0 on your credit cards may factor into your debt to income ratio" Is this true? Should I pay off my credit cards and then cancel them? I don't necessarily want to lose some of my cards just because their 0 balances can be used against me. Secondly, if I have a card that has been at 0 for awhile but it is closed (by the bank) because I haven't used it in over 6 months, will this closure reflect negatively on me in the future? I would be inclined to say that closing accounts may scream to a loan giver that I am self admitting I am not able to be responsible for thse card and thusly, should close them to prevent further damage. However, I can see where having all that "available" credit may cause one to think I can quickly throw myself into a world of debt simply because it's available to me. Thank you in advance for you input! C
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| | Monday, November 29, 1999 - 12:40 pm I don't see how a zero debt can be calculated into a debt to income ratio. It's not a debt. For some time now Sean has been asking for the denial code that a bureau gives when one has too much credit. No one has answered. I have repeatedly heard that having too many credit cards can hurt the score, even if the balance is zero. I asked about this recently and if I recall correctly, someone on this board responded that an unused credit line shows as a "n" on the report, which is basically "no information" and is neither good nor bad. So maybe the only bad thing about a zero balance card is if one has too many revolving accounts. If you read some of the last 2 weeks of posts, this issue has been visited.
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| | Monday, November 29, 1999 - 06:29 pm There are adverse action codes for having too many credit cards and there are adverse action codes for having had no recent balances. It's not impossible to gain points by closing an account and it's not impossible to lose points by having an account open with no balance. That's not the point. The point is some people need a 660 to get a loan and they get a Beacon score of 658. The underwriter shares the score with them and they both start thinking, "All I need is 2 points, where can I get them?" Then they look at the denial codes. Let's say he's got three codes: (11) Amount owed on revolving accounts is too high. (10) Proportion of balances to credit limit is too high on revolving accts. (4) Too many bank or national revolving accounts. So they decide (or the underwriter tells him) that closing one of his credit cards might increase his score enough to get the loan. So they do it and 45 days later they pull his loan again only to find out that he now only scores 623 with these codes: (10) Proportion of balances to credit limit is too high on revolving accts. (11) Amount owed on revolving accounts is too high. (8) Too many recent inquiries last 12 months. Needless to say closing an account was the wrong move! He'd have done much better to call up all his credit card companies and ask for an increased credit limit or begging his Mom/Dad for $$$ to pay down one of those credit cards. Even that might not have helped enough considering the increased inquiries he was placing on his profile. I advise you not to close any of those cards and if you feel you must, close one that still has a balance on it.
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| | Monday, November 29, 1999 - 06:54 pm I may be a little slow, but can you explain the 10) Proportion of balances to credit limit is too high on revolving accts
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| | Monday, November 29, 1999 - 07:10 pm Sure can. Check out http://www.advantagecredit.com/creditreporting/adverse_reason_codes.htm
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| | Tuesday, November 30, 1999 - 02:37 am voigtkampff .... One possible way for a zero balance to affect the debt to income ratio is that they calculate the monthly minimum payment on the credit line (as if you maxed it out) rather than applying zero payment for that paid off card.
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| | Tuesday, November 30, 1999 - 06:29 am Sean, why does closing an account show as an inquiry? Charlie, are you saying that if a consumer does not have a monthly minimum payment on a credit line, then a future potential lender will impute one. And that they will impute the highest possible minimum, as if the card were maxed out??
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| | Tuesday, November 30, 1999 - 07:26 am Voigtkampff: It's not that closing an account adds an inquiry, but the guy (in the example) went in to apply for the loan and that put an inquiry on his credit report. Going back 45 days later not only do you have to improve your score what you were short, but the inquiry you had initially done may lower your score as well.
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| | Tuesday, November 30, 1999 - 10:41 am So how do you know what's the best? I mean, how do I know if I'm going to be turned down? If I go in and get turned down for one loan, then, try to apply for a lesser loan, it really sucks that I will get turned down for that one just because another loan agency inquired about my credit a week before. Heck, I may have the necessary credit but that one inquiry will kill me.
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| | Tuesday, November 30, 1999 - 12:04 pm Sean, in your example, the consumer had already applied for the loan. That is how he knew that he was 2 points short. That inquiry was going to be there whether or not he closed an account. So it would not be fair to say that the consumer's lowered score indicates that closing an account is bad, and that increasing credit limits is good. I think that is what you were trying to exemplify. I'm not saying that you are wrong, but read the posts on this board. Everyone has a different opinion on this issue. All I have is theories.
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| | Tuesday, November 30, 1999 - 07:34 pm voigtkampff: I have bad news for you -- all you're going to get is theories! Since none of us know the exact formulas we are working off of the publications that Fair Isaac provides and the adverse_reason_codes list and a little intuition and common sense. All I can say is take two persons: Person A and Person B. Person A has a $100,000 mortgage. Person B has a $100,000 home equity line of credit on his house that he owes $0.00 on. Who do you think is the better risk, person A or person B? I should like to point out that there is no FICO denial code for having too much credit, nor is there any FICO denial code for debt-to-income ratio too high. A person's income is not found on their credit profile and things like this cannot be calculated into FICO scores because they are unknown. This does not prevent any creditor from designing their own judgemental or emperical scoring system that takes income to debt ratios into account as a measurement of default risk. We have no information to work off of these types of proprietary scoring systems. Normally debt-to-income ratios are used to determine not your eligibility for a loan but to determine the maximum loan a person will receive. Conventional mortgage debt-to-income ratios are normally expressed as 28/36. Only 28% of a person's gross income will be permitted to go towards their house payment and only 36% of their gross income will be permitted to go towards all debt management (including house payments). The normal problem is that a person spends more than 8% of their income on debt management. Let's suppose the person spends 15% of their income on debt management. Then the bank would only permit them to spend (36-15) 21% of their income on house payments. The size of the loan they'd be approved for would be 75% of what they could've gotten if they had no debt. In other words, if they still want that 3 bedroom, 2 bath home in the suburbs they'd need to come up with a lot more down than they had planned. Alternatively they could have a nice, 2 bedroom 2 bath home at a less desirable location. As a final note I throw in the caution Fair, Isaac gives on the matter from couples who tried to "fix" their score at the advice of their mortgage broker by closing credit cards -- with disasterous effects on their FICO scores. http://www.fairisaac.com/servlet/SiteDriver/Content/718 (emphasis added) Probably the key mistake the California couple made in their credit score quick-fix effort was to suddenly cancel six cards with relatively small unpaid balances and combine their debt on just three cards, said Michael Rapaport, one of Fair, Isaac's top officials for credit score design. That had the effect of raising the ratio of their unpaid balances to the maximum credit lines available on the three cards. Before the card cancelations, by comparison, they had more cards and a higher overall dollar limit of credit available to them, but they had lower balances spread among half a dozen cards. The net result was to make them look more "extended" on their credit use than they looked before the fix. With this in mind, here's Rule 1 on maintaining or getting a higher score: Don't even come close to "maxing out" on your cards. It's statistically better to have smaller balances on more cards than high balances relative to your credit limits on just a few cards.
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| | Wednesday, March 15, 2000 - 03:17 pm Well it's my turn to ask this question.How can a C.R.A. scoring module tell the lender that he or shes has too much credit when the FICO scores don't calcalate his or hers income to begin with?Does this makes sense?Unless it takes your income into consideration then it has no right to display the reason code.Credit scoring is very tricky,and i agree we need not to try to beat the system by doing different things that we think will inprove the score.The best thing we can do is to not worry what the number is but keep managing credit wisely.
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| | Wednesday, March 15, 2000 - 04:53 pm Wisely? I used to think it was wise to pay as little interest as possible. Yet, shopping for, or even just accepting offered credit can devastate Scores. Is it wise to pay bills twice in fear of collections on your credit? Is it wise to pay bills you don't owe? Is it wise to pay off anyone who threatens with a law suit in fear of damaging your credit? Is is wise to get loans just to establish a credit history, while you could pay cash? You tell me ....
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