Keeping Credit Limit Down Helps Raise Credit Score

Q: Cudos for getting it right about how lowering a card limit would lower a credit score.
 

What wasn't right was the statement about "lenders get concerned when someone has five to 10 credit cards, each with $10,000 to $50,000..."

The truth is lenders don't analyze nowadays a credit report as you purport. If the FICO score is above Freddie or Fannie's minimum, the loan gets approved and the paper [also known as the mortgage] can (and generally is) sold on the secondary market.

The vast majority of US consumers have no business having more than one credit card with a $5,000 limit, so your comment was responsible from that standpoint, but somewhat naive from the lenders viewpoint.

A: You’re right about one thing – most lenders only care what credit score a prospective borrower has. The possibility that a borrower might go on a spending spree and binge on credit just before closing on a house isn’t always top of mind.

However, many quality lenders will pull a second copy of the borrower’s credit history and credit report just before closing, to make sure the numbers and lending ratios haven’t changed much since the application was processed.

I do know some lenders (particularly those that plan to keep the loan in their own portfolios) will take a closer look at a prospective borrower’s credit history, including the number of cards and the maximum available credit limit, if only to better understand what’s behind the credit score.

But I do believe that having too much available credit, especially if you carry a balance that exceeds 30 percent of that available credit, still counts as a negative when credit scores are tabulated.

So, I should have written that sentence more specifically to talk about how having all those credit cards potentially burning a hole in one's pocket can lower a credit score.

Thanks to all my readers who took the time to write about these issues.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.