Credit and Credit Scores: A short lesson

[James Boston]

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James,

I think you are wrong. The specific point I disagree on is that I think a low ratio of used credit to available credit is a good thing. So leave all the CC's open because they lower the ratio, and all things being equal, a lower ratio is better than a higher one.

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Huh? I agree that a lower ratio is better. If "X" = available credit, and "Y" = credit outstanding, then we could express the ratio as X:Y. The more lines of credit you have open, the more "X" increases. If "Y" remains constant, you're ratio gets higher by opening more lines of credit (increasing "X").

Am I misunderstanding you?

[milliondollaz]

yea, i think you've got it upside down. or i do.

Lets say I have $1000 on a CC with a $2000 limit. IF I have 4 more CC's that have $2000 limits each (but I never use them), I am helping my credit by only having a 1:10 ratio, as opposed to a 1:2.

[James Boston]

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yea, i think you've got it upside down. or i do.

Lets say I have $1000 on a CC with a $2000 limit. IF I have 4 more CC's that have $2000 limits each (but I never use them), I am helping my credit by only having a 1:10 ratio, as opposed to a 1:2.

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You're backwards, at least by my recollection of how it works. Look at it this way:

You have a $2000 CC with $1000 used. You go apply for a loan. They see that, at worst, you could run up another $1000 in debt. That's not so bad.

Now, you have $10,000 in CC lines with $1000 used. You apply for the same loan, but now you could rack up another $9000 in debt, which could put you in a situation where you would default on the loan you're applying for. That's worse.

[edfurlong]

Wow, I'm a piece of [censored]. How can I have a 568 at myFICO without a hit squad being sent out after me? I'm such a flake.

[Cubswin]

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That's dumb. The point is that if you can't afford to buy a house outright, it's much better from a tax perspective to buy a house and get a tax break than to pay rent and not.

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From a tax perspective it is certainly better to buy a house and get the taxs breaks. From a financial perspective, especially in todays market, renting is often the wiser choice.

[milliondollaz]

These two tidbits are from HowStuffWorks.com - How Credit Scores Work.

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Advice used to be given to close old and unused credit card accounts in order to reduce your “potential” available credit (which could change your debt ratio after you’ve been approved for a loan). Now, however, the ratio of your debt to your credit limit is more critical, so closing old accounts only raises that ratio – which you don’t want to do. Some people have moved debt from several credit cards to one card and then closed the old accounts. Since creditors look at the debt-to-credit limit ratio this can have a bad affect on your credit score because you have the same amount of debt but less available credit. So don’t close old credit card accounts just because you’re not using them.

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and also,

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Reduce your balances on credit cards to 75% or less of your available credit (25% is preferable).

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The reason I noticed your post, is that I had been told the exact same thing. But the more research I did, the more I realized that FICO or whatever, did not follow my logic. I completely understand your point, but I do not think it is true. FWIW, they say "raising" your ratio is good, so I guess I was the one who was backwards!

Along the same line, (assuming I'm right) call up your credit card companies and ask them to raise your limits. It might work! And it will improve (lower??) your debt ratio.

[Cubswin]

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What's good? Do you know what your score is?

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My score has ranged between 742 and 780 in the last 12 months. I did a mini app-o-rama to take advantage of some milage cards and other promos which has brought me down a little until the hard pulls fall off. Im happily reaping the benefits of the current renters market so I dont have to worry about maximizing my fico for the near-term. Generally, 720 or 730 is the minimum point for the best interest rates.

[The DaveR]

Fox, I thought the agencies reported data but every credit institution uses its own variant of a FICO score using a credit agency's data to decide creditworthiness. Is this an accurate representation?

[Cubswin]

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Along the same line, (assuming I'm right) call up your credit card companies and ask them to raise your limits. It might work! And it will improve (lower??) your debt ratio.

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If you are disciplined it is a good idea to have your credit limited increased. Just be sure to do you research and find out if your credit card company does a hard pull for credit line increases.

Another piece of advice for increasing your score, when you pull your credit report check to see which companies are not reporting your credit line. Capitol One, for instance, reports your high balance as your credit limit which is bad. Avoid Cap One for your first credit card because it can throw your utilization out of whack. Recently I have noticed that Chase has not been reporting my credit limits on all 3 cards I have with them. I wrote them saying that by them not reporting my credit limit my fico was being adversely effected. I asked them to report my credit limits or else I would do my buying with another card. They complied.

[James Boston]

Million-

First, I'm really not an expert on this, so someone else should really verify my statements.

You're not wrong, but I'm not either. The advice you're quoting is based on the idea that having a 1:1 ratio is also bad. That's an indicator that you're maxed out, and you're having trouble managing the debt you have. On the other side of the coin, having a 20:1 ratio isn't favorable either, for the reasons I already mentioned in the other post.