A Change in CC Conventional Wisdom?

[Lucid08]

I've been a member of this site since beginning my credit building journey in late 2007, and since then I have made great strides in establishing my credit file and score. This includes getting 3 credit cards with what I consider conservative credit limits when compared to my income.

Due to being a veteran I've recently began checking into using my VA benefit to take advantage of the current housing market/prices. I was directed to the VA loans website and came across a .pdf file  labled "VA Home Loans 101" which details what a person needs to do in order to qualify for a VA backed loan.(didnt post the link because I'm not sure about the rules for doing so, so I'm quoting directly from the .pdf file)

On page 7 of the .pdf file it states:

"One important factor many people aren’t aware of is how lines of credit affect your chances at getting a loan. Let’s use John Smith as our example. John has four credit cards with a $5,000 credit limit on each card. John carries a zero balance on three of the four cards, and carries a monthly balance of $800 on the fourth card. He pays his bills on time and is a good credit risk.

There’s just one problem. John has a potential debt of $19,200. He could max out his credit cards at any time for a total debt of $20,000. This potential can affect his credit‐worthiness. A good financial advisor will tell you to limit your potential debt as much as possible by getting rid of unused lines of credit, paying off cards and canceling them, keeping only the essentials."

I bolded the last part of the quote because it seems to fly in the face of what is often referenced around here as "good credit card practices" when it comes to maintaining a good credit score by keeping your utilization under a certain percentage across all cards. I'm now left wondering if I should seek CLI's on my current cards, or if I should somehow contact my CCC's and tell them to -not- give me any auto-CLI's should I become eligible for one. If my chances of getting approved for a VA loan are going to be based on how much "potential" debt I have, it would seem that I need to change my -financial- way of thinking based on this new found possibility.

Opinions?

[ocheosa]

Hello,

There may be specific criteria for a VA loan. You may want to contact a loan officer from either your bank or a local institution that can walk you through current underwriting standards. I wouldn't be to quick to start closing or changing accounts close to shopping a mortgage. Could do more harm than good.

[Lucid08]

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@ocheosa wrote:

Hello,

There may be specific criteria for a VA loan. You may want to contact a loan officer from either your bank or a local institution that can walk you through current underwriting standards. I wouldn't be to quick to start closing or changing accounts close to shopping a mortgage. Could do more harm than good.

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Yes, trust that I know these things. I just find it odd that this would be a criteria that is used to qualify someone for a VA loan since the conventional wisdom says that having higher CL's helps with utilization. Shooting myself in the foot with the push of a "luv button", or apping for a new, higher limit card could have been a possibility for me prior to reading the referenced .pdf file.

[ocheosa]

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Lucid08 wrote:

Yes, trust that I know these things. I just find it odd that this would be a criteria that is used to qualify someone for a VA loan since the conventional wisdom says that having higher CL's helps with utilization. Shooting myself in the foot with the push of a "luv button", or apping for a new, higher limit card could have been a possibility for me prior to reading the referenced .pdf file.

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I find it odd as well. But since you are getting a prime rate, plus the $8k tax rebate, who cares!  I'd do whatever was necessary for that loan. After about 1-2yrs in your new home, then raise your limits. Good luck to you! And happy fathers day!

[hdporter]

The "VA Home Loans 101" document that you cite is authoried from the website valoans.com.   This website is owned by a firm that assists people in obtaining loans -- it's not the government; it's not a lender.

I'd take the info with a grain of salt.  Most lenders recognize that available credit isn't debt, and that anyone creditworthy can go out and hang themselves with new debt at any time, if they're so inclined.  It doesn't take open, unused lines of credit.

Conventional wisdom stands that a key ratio in the credit scoring used to evaluate any mortgage application is utilization -- having strong credit limits is an asset.

[KingAdrock]

The idea of "Too much open credit" as a red flag while applying for a loan does happen... but it seems to be very, very rare. Generally I'd say it isn't a problem. But even if it is, you can always request CLD from your CCCs.

[Anonymous]

It will also depend on the age of accounts.  If most of the CCC's are very new, then you have not established a history with all of that "potential" debt.  But if the cards are several years old and in in good standing, then the lender can see how you handle and use it.

[medicgrrl]

Back in the old days an applicant would have to qualify based on the maximum credit available and the corresponding payments.  This guideline changed many years ago and now only the current payments and balances are used for qualifying.  Honestly, I wouldn't worry about it. 

[cabarkeep]

I agree with the others I wouldnt really worry too much about it although I can tell you that when I apped and got a US Bank card they said they kept my limit at 5000 because I had too many other open accts with large available credit lines so why would I need to have that high of an amount with them.

I explnd to them that i only appd their card because they had a special bal transfer preapproval sent to me with NO BT fee and 1.9 for 4 years ....so i was trying to consolidate a couple cards to this one ...

Did not matter they said because i had about 100k available on other cards underwriting would only authorize 5k at this time ... also my income was not that high ... HHI was 125k ..personal was around 75k when i apped...

credit at the time was probably in the mid 700's ....

So long story short yes it matters sometimes but most of the time dont worry about it ...

Personally I would rather have a diverse choice of credit cards just in case one or more decide to CLD you when you have a balance ... with more cards it will not hurt quite as bad as far as debt to avail credit .... after experiencing a AMEX and Discover CLD i know it could happen to anyone for no reason ...

keep your head down and keep balances low!