"Too Much Credit" misconception

Anonymous · ‎08-19-2011

After reading dozens of threads about people in various stages in their credit careers, I've begun to encourage my girlfriend to start developing a credit history. She likes to pay in cash and really doesn't have any grasp of how important it is to start as soon as you can.

Anyway, her dad is a CPA and she asked him about credit cards today (I wasn't around for the conversation, so I don't know exact details). He told her that you don't want to have too much credit via credit cards because - and this is the example she told me he used - if you apply for a home loan of, say, $100k and you have a $50k credit limit across all of your cards, that the bank views you as already "borrowing" $50k (no, not a $50k balance, just a $50k total limit) and will not grant you the home loan.

Based on what I've read here and common sense/logic, I find it very hard to believe that you can have too much credit. I also find it very hard to believe that any credit savvy person or organization (say a bank, or any other lender) thinks borrowing money and having available credit as the same thing.

Am I missing something here?

Anonymous · ‎08-20-2011

Underwriters most certainly give varying degrees of consideration to your potential to run up debt & jeopardize your ability to pay. Too much credit can be a problem in the mortgage process, particularly so if you're stretching th outer limits on the amount of loan you can afford. Here's an example:

Sam is in the market for a mortgage loan. His income is $50k. He has a car payment of $300/month, and a student loan payment of $100/month. He has $70k in available credit, but zero credit card debt. He finds a nice home with an asking price of $200k, annual property taxes of $3750, and annual home owner insurance costs of $600. He's applying for a FHA loan, with a $14k downpayment. After the offer/counter-offer negotiations, Sam finally settles upon a price of $187k. The total loan amount is $173k, at a 4% mortgage rate.

Even with reasonable reserves, Sam would be at, or just beyond the outer limits of a loan for his income & DTI. An aggressive loan would cap him at about $185k of home, and $172k of loan. But, depending on the available market, it may or may not be reasonable to find a home below that price. So, the lender may do the loan, but with the condition that Sam close all, or some of his credit cards. It happens. We actually had a member, very recently (last few months) who was required to close ALL of her credit cards as a condition of the loan. The reason is that if Sam were to close on the home, the lender funds the loan, Sam takes the keys, rides off into the sunset, but takes a detour at Home Depot, Lowes, and BillyBob's Home Rebuilder's Extravaganza, running up $40, $50, or $60k in debt, his ability to pay his mortgage may suddenly be seriously jeorpardized. There might not be nearly as much concern with a smaller loan, or a bigger (20% or greater) down payment, or with less credit than he has income, for example.

smallfry · ‎08-20-2011

After a while it just becomes about ego. How much available does anyone who doesn't charge business expenses or have a life style like Trump really need? I have found that trying to spread expenses among more than 5 credit cards to be impossible. If you find you charge around 3K a month then 20 times that in available credit is surely enough. After all it's just available credit not money in the bank.

Strict loan officers might get spooked by outsized lines of available credit. Wouldn't you especially after the recent mortgage debacle?

haulingthescoreup · ‎08-20-2011

@smallfry wrote:
After a while it just becomes about ego. How much available does anyone who doesn't charge business expenses or have a life style like Trump really need? I have found that trying to spread expenses among more than 5 credit cards to be impossible. If you find you charge around 3K a month then 20 times that in available credit is surely enough. After all it's just available credit not money in the bank.

Strict loan officers might get spooked by outsized lines of available credit. Wouldn't you especially after the recent mortgage debacle?

Some do. Most don't. I agree that this is fluid though, especially if the economy is about to tank again.

Time might factor into it as well. LO's might view large amounts of available credit differently for someone who has had them and managed successfully for 8 or 10 years than for someone who just got into the credit world and has no real track record. Just a thought.

* Credit is a wonderful servant, but a terrible master. * Who's the boss --you or your credit?
FICO's: EQ 781 - TU 793 - EX 779 (from PSECU) - Done credit hunting; having fun with credit gardening. - EQ 590 on 5/14/2007

Anonymous · ‎08-20-2011

OP,

You might want to post this on the "Mortgage Loans" forum - or ask to have it moved there.

You'll get some specific feedback about your question from those who have been on both sides of the mortgage process.

"Understanding FICO Scoring" is a nice place to hang out as well, but folks who are super mortgage savvy may tend to look for these types of questions on the "Mortgage Loans" forum and you may want to hear from them as well.

Anonymous · ‎08-20-2011

Thank you for all the input everyone. I understand how excessive amount CL on credit cards could be a little unsettling for mortgage companies.

I'm going to repost this same topic in the mortgage section but rephrase it to ask for personal experiences.

stan_the_man · ‎08-21-2011

@Anonymous wrote:
Underwriters most certainly give varying degrees of consideration to your potential to run up debt & jeopardize your ability to pay. Too much credit can be a problem in the mortgage process, particularly so if you're stretching th outer limits on the amount of loan you can afford. Here's an example:

Sam is in the market for a mortgage loan. His income is $50k. He has a car payment of $300/month, and a student loan payment of $100/month. He has $70k in available credit, but zero credit card debt. He finds a nice home with an asking price of $200k, annual property taxes of $3750, and annual home owner insurance costs of $600. He's applying for a FHA loan, with a $14k downpayment. After the offer/counter-offer negotiations, Sam finally settles upon a price of $187k. The total loan amount is $173k, at a 4% mortgage rate.

Even with reasonable reserves, Sam would be at, or just beyond the outer limits of a loan for his income & DTI. An aggressive loan would cap him at about $185k of home, and $172k of loan. But, depending on the available market, it may or may not be reasonable to find a home below that price. So, the lender may do the loan, but with the condition that Sam close all, or some of his credit cards. It happens. We actually had a member, very recently (last few months) who was required to close ALL of her credit cards as a condition of the loan. The reason is that if Sam were to close on the home, the lender funds the loan, Sam takes the keys, rides off into the sunset, but takes a detour at Home Depot, Lowes, and BillyBob's Home Rebuilder's Extravaganza, running up $40, $50, or $60k in debt, his ability to pay his mortgage may suddenly be seriously jeorpardized. There might not be nearly as much concern with a smaller loan, or a bigger (20% or greater) down payment, or with less credit than he has income, for example.

I don't see this as a concern for someone who is at least one year out from a mortgage loan. If the bank makes me ask for CLD or to close a couple card to reduce my my total revolving CL, that's something I can deal with in the future. Since the card(s) would have aged by the time I get to that point, I likely won't be taking a hit for a new account, a new inquiry, and reduced AAoA (I realize closing an account doesn't reduce AAoA, but opening the account does).

I'd do all the credit savvy things now, and worry about what a concerned underwrite wants me to do down the line. Rather than the other way arround. Now, if I was less than one year out, I'd be working my butt off trying to figure out how the underwriter is going to view my credit file.

FWIW -- There's something to be said for being an Amex cardholder. Even if the underwriter asked me to close revolving TLs, I can get the history back for the low, low cost of an EX inquiry.