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Hypothetical Example

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Regular Contributor

Hypothetical Example

Pristine reports, high scores. You have $10K in revolving credit and you show 0% util, which yields a nice score. You get approved for a $100K mortgage, and it's now showing as a $100K debt. This immediately affects your score, because your overall util is high.

Now, let's say you had $100K in revolving credit before getting approved for the $100K mortgage. Assuming, you keep this $100K revolving CL at 0% util still, wouldn't having such a high available CL in revolving credit 'dilute' the overall debt and keep the debt to util ratio down, thereby keeping your score from dropping much as it otherwise would?

Am I not understanding this correctly? I'm this makes sense, then when someone accumulates quite a high CL in revolving credit just for this purpose, even if they don't ever get to use it, it would still help them manage the scores in a better way when dealing with a mortgage? Thoughts?
Message 1 of 10
9 REPLIES 9
Frequent Contributor

Re: Hypothetical Example

Don't mistake revolving debt with installment or mortgage debt. Revolving debt is what matters for the utilization you're thinking about.

Message Edited by db23 on 10-16-2007 10:07 PM
Message 2 of 10
Frequent Contributor

Re: Hypothetical Example

In your example, I would bet that your score would go UP not down.
Message 3 of 10
Moderator Emeritus

Re: Hypothetical Example



ficus wrote:
Pristine reports, high scores. You have $10K in revolving credit and you show 0% util, which yields a nice score. You get approved for a $100K mortgage, and it's now showing as a $100K debt. This immediately affects your score, because your overall util is high.

Now, let's say you had $100K in revolving credit before getting approved for the $100K mortgage. Assuming, you keep this $100K revolving CL at 0% util still, wouldn't having such a high available CL in revolving credit 'dilute' the overall debt and keep the debt to util ratio down, thereby keeping your score from dropping much as it otherwise would?

Am I not understanding this correctly? I'm this makes sense, then when someone accumulates quite a high CL in revolving credit just for this purpose, even if they don't ever get to use it, it would still help them manage the scores in a better way when dealing with a mortgage? Thoughts?


The best way to understand util% calculations is to remember revolving util% calculations carry considerably more weight in FICO scoring. Util% calculations for other loan TLs do not factor mortgages only non-mortgage TLs such as SL, auto and personal loans.
 
So in your scenario I don't think it would make a bit of difference in scoring except that having available credit reporting with no util would be good and that alone would improve scores for the fact you handle revolving credit well and not that you are diluting anything.
Message 4 of 10
Regular Contributor

Re: Hypothetical Example



@db23 wrote:
Don't mistake revolving debt with installment or mortgage debt. Revolving debt is what matters for the utilization you're thinking about.

Message Edited by db23 on 10-16-2007 10:07 PM




Got it. OK, another question then. I've seen situations when some people with a mortgage have difficulties getting approved for cards that they may desperately need. Depending on their report, of course. Everyone is different. You know how they tell you to stay away from applying for cards if you're planning to shop for a mortgage relatively soon? If, let's say, someone was just barely able to qualify for a mortgage, they may have difficulties getting approved for cards if they decide they need them now. So then is it not a good idea to obtain as many cards with as many features as you'd like to have before the mortgage if you anticipate things being rather tight carrying a mortgage?
Message 5 of 10
Regular Contributor

Re: Hypothetical Example



@db23 wrote:
In your example, I would bet that your score would go UP not down.




That's exactly what I'm suggesting! I definitely couldn't say what actually would happen, but common sense suggested to me that the score would at least be more manageable with high-CL ripe CCs on board. I thought I may have been mistaken in my rationale not fully understanding how FICO views different types of accounts. So I had to ask.
Message 6 of 10
Legendary Contributor

Re: Hypothetical Example

Obtaining a new mortgage affects %install loan util, and not %revolv util.  The increased %util for installment loans influences score only miniminally compared with increased %revolv util. Also, adding a mortgage can additionally have a positive influence on the category of type credit mix. All that being said, regardless of the short term effect on credit score, adding the mortgage will increase overall debt to income ratio and overall debt, which will be taken into account by any CCC in addition to FICO when making a decision on grant of a new card. Also note that Advantage (as opposed to FICO) credit scoring includes a category for overall balances in addition to %util.   I doubt that any CCC would grant a new  line of 100K revolving credit immediately after an applicant has taken on a new 100K mortgage, regardless of FICO score. In fact, I would be shocked, unless you are in the 250K+ income bracket with no additional debt at all.  Substantial new credit at this point would probably have to be secured through Tony Soprano.
Your question is an excellent example of how FICO is not the end all for any lender in making new credit decisions. Even "pre-approved" offers for new revolving credit require the additional review of current credit status, and are not granted based only on the FICO score they use to extend the "pre-approved" offer.


Message Edited by RobertEG on 10-16-2007 07:52 PM

Message Edited by RobertEG on 10-16-2007 07:58 PM
Message 7 of 10
Regular Contributor

Re: Hypothetical Example

OK, so we all agree, at least in general that in all probability it would be good to have than not to have accumulated a cool amount of 'buffer' revolving credit long before applying for a mortgage. So then it would stand to reason that people who amass a small 'fortune' in revolving credit are effectively changing the future in their favor, to however small degree. I will take now what I may not, for whatever reason, be able to get later. It's a practical choice, really. Otherwise, up until recently I've only had a single card for over a decade.
Message 8 of 10
Regular Contributor

Re: Hypothetical Example

By the way, once you have amassed all the revolving credit you may ever need, for the sake of the argument, you wouldn't need to ever apply for cards anymore, especially since the credit limit and age on the existing cards may have now become even higher. This way, you can effectively stay away from bloating your reports with unnecessary inquires. And if at some point FICO complains about how you haven't been looking for new credit lately, you can always apply for a card and then cancel it before activation. This way you control how many inquiries your report gets to list, leaving way for inquires you can't avoid if say you get a new car, get a HELOC, whatever. After all, aren't we all into exerting positive influence on how our scores change?
Message 9 of 10
Moderator Emeritus

Re: Hypothetical Example



RobertEG wrote:
Obtaining a new mortgage affects %install loan util, and not %revolv util.  The increased %util for installment loans influences score only miniminally compared with increased %revolv util. Also, adding a mortgage can additionally have a positive influence on the category of type credit mix. All that being said, regardless of the short term effect on credit score, adding the mortgage will increase overall debt to income ratio and overall debt, which will be taken into account by any CCC in addition to FICO when making a decision on grant of a new card. Also note that Advantage (as opposed to FICO) credit scoring includes a category for overall balances in addition to %util.   I doubt that any CCC would grant a new  line of 100K revolving credit immediately after an applicant has taken on a new 100K mortgage, regardless of FICO score. In fact, I would be shocked, unless you are in the 250K+ income bracket with no additional debt at all.  Substantial new credit at this point would probably have to be secured through Tony Soprano.
Your question is an excellent example of how FICO is not the end all for any lender in making new credit decisions. Even "pre-approved" offers for new revolving credit require the additional review of current credit status, and are not granted based only on the FICO score they use to extend the "pre-approved" offer.


Message Edited by RobertEG on 10-16-2007 07:52 PM

Message Edited by RobertEG on 10-16-2007 07:58 PM

Mortgages do not factor in installment util% calculations, but I do agree having one reporting does improve credit mix.
Message 10 of 10
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