Credit limits and credit scores

I recently suffered a minor bout of “stolen debit card number/stolen funds” which got rectified in a matter of days. My banker suggested that I not use my debit card any more for internet purchasing as it’s risky to give potential thieves access to your checking account balance. Lesson learned.

So he opened me a low limit credit card to be used solely for internet/phone/non-familiar store purchasing. I’d actually been approved for a considerably higher credit limit but I told him I didn’t need it. He suggested transferring the “extra” limit over to another credit card I hold with them (I use that one for managing 0% interest purchasing so I don’t want to get regular interest-bearing purchases tied up in that one- I’m just enough of a non-mathematician to screw that up). My question to him was, “Won’t the increase in my credit limit count against my credit score?” He said “No.” (I have good credit- mid 700s)

My question to you is, “Was he right?”

I may be in the market for a new car and I would suspect that inquiries into my credit will turn up this high credit limit hanging out there and count against me in the financing department, unless there’s something I don’t understand. If I decided to lower this credit limit, how long until the reporting agencies show this and get me into better shape?

When a lender is evaluating you for an installment loan, like a car loan, extended but unused revolving credit is almost the same as debt you actually owe. I’m not sure if it’s treated somewhat different or if it’s exacty the same.

But think about it from their perspective. How different are the following people.

1 Guy wants to borrow $20,000 for a car for 4 years. He has a $30,000 installment loan against his personal residence and no other debt or credit cards.

A different guy wants to borrow the same $20,000 for 4 years. He still owns the house but it’s owned free and clear, but he has a $30,000 credit limit card with $0 balance.

That 2nd guy can legally spend $30,000 he now has to pay back the day after he closes on the car loan, and the lenders know that.

The bigger question is whether it hurts your credit worthiness enough to be a big deal and that’s harder to answer. If you have good credit, a good income and assets I doubt it would ever matter.

On the other hand, I just started the process of refinancing some debt from a business I owned and I closed about $40,000 worth of credit card limit that my banks had been gracious enough to give me over the years. I don`t like lenders seeing that much credit just sitting there, if I’m actually applying for something.

Part of your credit score is based on your debt to credit ratio. Having credit available to you is a sign that you are able to manage your finances responsibly. Lenders usually like to see that consumers have a large amount of credit available to them. Having a high unused credit limit will improve your credit score.

Maybe I’m dumb, but I’m not seeing how these are the same. The second guy may be able to “legally spend $30,000,” but he hasn’t, as opposed to the first guy, who has. Looks to me like the second guy is in a much better position than the first. What am I missing?

The day after the 2nd guy buys the car, he can go out and spend $30,000 on baseball cards and bubblegum with his credit card, incurring a $30,000 debt on the card, and there’s nothing the car dealer can do about it. So the car dealer has to take that possibility into account.

Yes exactly. Sorry, I could have made that connection clearer.

So if they increased the credit limit last Monday, and if I call today and have the credit limit lowered, how long 'til the reporting agencies get that all updated?

I get that.

What I’m not getting is how a person who has actually borrowed and spent $30,000 is the equivalent of someone with merely the potential to spend $30,000. Shouldn’t it be obvious that the second fellow has good enough credit to have a $30,000 limit, and that one does not earn that good credit by buying $30,000 of baseball cards and bubblegum with said credit?

Man #1 has $30,000 in debt already, and if given the auto loan will be $50,000 in the hole.

Man #2 has $0 in debt already, and if given the auto loan will be $20,000 in the hole, plus he owns property that is easily worth the value of the auto loan, and likely many times more.

How is that the same risk?

Credit cards usually report changes once a month, IME.

It’s not exactly the same risk, but it’s riskier than not having the credit extended at all and lenders aren’t prone to giving people the benefit of the doubt.

1 & 2 both have the same potential for indebtedness without applying for any additional credit and that’s the point.

Besides, both men have equity in their homes worth several times the value of the car loan. It’s unlikely a lender would care enough about either situation to deny them.

However, I was actually in this situation once in my early 20s. I had 3-5 years of good credit history, no house, a decent income. I applied for an unsecured equity line (I forget why), and I was rejected. The reason they gave was that I had excessive revolving credit available. I remember being annoyed because I had credit limits that were collectively as large as the line I wanted established, and all of a sudden that was a bad thing. They were willing to give me a credit card in the amount I needed but not a line of credit.

Okay. I suppose that makes sense, in a bizarre, creditor-logic sort of way.

It’s not like the credit ratings are produced by random-ass guessing. There’s a shit-ton of actuarial data that backs up those sorts of things. People without much credit use are unknown risks. People who spend up to their limit are x% more likely to default on their next loan. People who have a high limit but don’t use it are y% less likely to default. People who have ridiculous amounts of available credit are z% more likely to default, and when they do so the lender can be out a lot of money. And then that’s all broken down by demographics and every possible detail on your credit history.

Is bank credit the same as revolving credit? I always understood revolving credit to be the same as what department stores give on their credit cards. But maybe a bank credit card is also revolving credit. I’m not sure…

?

Just by their nature, credit cards are revolving debt. If you buy something and pay it off, you can go out and buy something else. Installment debt is usually used for only one thing and you can’t pay some down and go out and use it again. Also, there’s no end date as there is with installment debt.

Your experience was in trying to secure further credit, whilst the OP is trying to secure a vehicle. In the former, it makes sense to be suspicious of the person trying to get more credit, but for the latter, it doesn’t make sense to hold it against them. Think of it this way - the guy trying to guess if he’s credit worthy is able to see that others think the borrower is worthy. It’s like having someone vouch for you.

It’s not really true that “more unused credit = bad.” In fact if you have $20,000 in revolving credit limit, and you have $18,000 of debt against that (so only $2,000 unused) and pay down $8,000 so that your credit utilization percentage goes from 90% to 50%, your credit score and creditworthiness will almost always go up.

It is true that revolving credit you haven’t utilized is a risk, but to a degree you absolutely need some of it or you are essentially an “unknown” and unknowns can have a very difficult time securing financing for first time home or auto loans.

I called my bank to get some insight, and my banker said almost the same thing. She said the most ideal scenario is to have at the most a 30% balance to credit limit ratio. So if you have a higher limit, and a lower balance, this will look much more appealing to someone who wants to lend to you then say, a balance and a limit that are much closer together. So the increase of my credit limit made my balance to limit ratio about 20%, instead of around 40% as it used to be.

I’m cool with that. Think I’ll start looking at some cars. :slight_smile:

As others have hinted, having large credit lines ends up being good for your scores, it lowers your utilization which is fairly important factor in your score. Even though I don’t use it or need it, every year or so I will call up my credit card companies and ask for credit limit increases. This is purely for your FICO score though, depending on the loan type companies will often look beyond your score and look at your actual credit report (or will have their own model for scoring). In these cases having a large amount of revolving credit available to you may or may not count as a negative to them. If it is an issue on an otherwise solid credit report in my experience they will either ask you to close a card/lower some limits or you can volunteer to do so yourself and the problem will go away. I think a lot of people are probably underestimating the amount of revolving credit necessary before this becomes an issue, I have roughly double my annual salary in revolving credit and I recently qualified for top tier rates on an auto loan.