Credit Card / Score And Loan Refin. Questions

[BadgerinATX]

I'm not buying a house or anything. These are based more on curiosity. I know not paying your bills on time and the like reduce your credit score. I've also heard that having a high credit limit on your credit card and never really getting close to it (say 10k credit limit and average bills less than 1k) can hurt your credit score. I'd think a high credit limit is something that is desirable (if you control your spending) due to the flexibility.

Does this drawback really exist, and if so is it just a marginal issue?

Second, what compels a company to refinance a loan/mortgage? Is this something in the contract to lure customers or are there heavy fees involved? If rates drop why would a lender allow the debtor to bargain for lower rates? I'm assuming this can't go the other way (rates go up and lender wants to refinance).

 

[Bookman]

Badgers? We don't need no stinkin' Badgers.

 

[madscientist]

part 1: high available balance. banks qualify you based on your current debts. if you have a credit card whose balance is near the limit, it tells them that you barely live within your means and have no reserve to fall back on, which makes you a higher risk to them. If you have a credit card whose available credit is large, they see that as opportunity for you to spend and raise your monthly debt. so if you have a card with a 10K limit and a 1K balance and you pay $30 minimum per month, you qualify at $30 per month but should you decide to buy a $5000 TV with the card and your payment suddenly jumps to $150 per month, now you've changed your debts and thus your debt to income ratio. as a rule of thumb, keep your balance between 30-40% of the limit for maximum points from FICO. over 50% has a hit, over 70% has a higher hit, and under 20-30 has a hit.

part 2, refinance. mortgages (and other loans) are set up where you pay each month's interest one month in arrears, and the rest of the payment is applied to principal. So in the beginning, you pay 98% interest and 2% principal and it slowly shifts over time until near the end when you are paying 98% principal and 2% interest. Banks want to be on the front of your loan for 2-3 years as much as possible. some banks hold notes for the first few years then sell them to larger banks like boa or chase and use the money to get a new loan. bottom line is that new loans pay more than old loans even if the interest rate is lower. thats why banks want to refi you. some banks would prefer the security of a 5 year good pay history (or whatever number they are comfortable with) and will wait for this pay history before buying a note. they make less money, but assume less risk.

 

[Seattle Husker]

I don't understand why having a high available credit limit with no debt owed can be a detriment to your credit score. I rarely carry any debt on my credit card but they keep raising the goddam limits. My wife is a teach and has one card through the NEA with a $35,000 limit. Shoot, my wife barely made that when she was teaching. We never use that card but from what I read here my credit score is taking a hit because some stupid bank thinks a teacher can afford a $35,000 credit limit?

That's ****** up.

 

[madscientist]

yes because of what would happen to your credit profile if you suddenly decided to run that card up to the tune of 20-30K.

 

[Skipper]

If that's the case, why should I not just cancel my $10.7 limit credit card when I get it paid off in March? My FICO going to take a hit because I cancelled the card? Seems like they get you whether you do or don't.

 

[madscientist]

FWIW the vice pres. of a major credit reporting agency told me and others at my office a couple of years ago that in general the best case to have is 3 revolving credit lines (credt cards), all at around 20-30% of their limit. and obviously paid on time. less cards means you either can't get credit or might want more later, and more cards says that you carry too much credit.

i forget the term, but the non-revolving credit such as financing furniture, carpet, or electronics gets a huge hit. avoid this if at all possible.

 

[Longhorn_Fan68]

I know that when we paid off our car loan this summer, my credit score actually went down a couple of points.

We made some pretty bad credit mistakes coming out of college. We put on our big-girl panties and paid everything off by seriously downsizing and careful budgeting.

We still have bad stuff on our credit reports. But for the last year we have carried no debt, (except our car which we paid off this summer) and we've seen our score do nothing but rise.

Honestly, we're probably 15-30 points lower than we would be without the negative history. BUT, we're still high enough now to be considered having "good" credit.

Anyway, my point is that you won't have bad credit if you don't have debt and pay your bills on time.