A colleague and I have a disagreement

The answer to this question has "two sides", and the quick answer is:
"You're both right", here's why:

1) YOU are CORRECT in that KEEPING the CC (w/High limit-low balance) HELPS his credit score. This feature increases his "approval" potential by showing he can manage credit wisely.

2) Your friend is correct in that the LENDER sometimes reviews "POTENTIAL RUN UP" of credit, and its potential effect on repayment. Lenders sometimes review a "worst case scenario" of what if you ran up all your available credit, and how could you pay.

In the end, it comes down to that individual lender, and how they look at "available credit". I know in conversations with my bank (for a Home Equity Line of Credit) that they looked at both factors. They stated that my "open CCs (with no balances) helped raise my credit score, and the higher credit score DOES affect the loan amount you can be approved for. But, they calculated "run up", and said they do look at a credit report for potential run up, and assess repayment ability.

So, it's a draw, you're both correct. But, if your friend's managing his credit that well, I don't think keeping the credit card account will hurt his approval chances. Unless he is trying to buy a VERY expensive automobile.

The other detail for his "approval" chances is where his FICO score lies. Lenders usually work in "ranges" of scores. So, if closing the account does not drop his FICO score into a "lower range", then he may pick up the advantage of "less run up risk" during lender approval review.

 

I am just a newbie but my understanding is that high limit on a cc is a positive factor b/c it shows lenders that other creditors have trusted you by lending you money in the past and the low balance is good b/c a large cushion between your current balance and your credit limit shows lenders that you are unlikely to overextend yourself financially.

I have also heard that a closed account is a closed account is a closed account. (i.e. it doesn't mater if account was closed by consumer or lender.)

 

woops - look like someone repsonded while i was typing my repsonse. of course you should defer to the senior member!

 

Sub-prime lenders might, but by doing so you will already have dropped your scores further from where they were.


If you have solid credit with high scores, I doubt any credible lender would require you to close accounts as a condition of lending to you. If you find some lender that requires this, find another.

If you have shown you can manage credit, such a requirement is a predatory act to try to lock you into their terms, and interfere with your ability to finance elsewhere, possibly on better terms. What are they up to? Low ball offer, bait and switch?

 

Not to open a huge debate here, but it is the "predatory and usury laws" which are at the heart of this. Lending institutions regulated by the FTC and banking laws do have "legal limits" on how much they can lend to you. The amounts are dependent upon the factors of income, credit score, total current debt, total available credit, and stability of value of any securing assets.

Lending institutions are regulated upon how much "credit" they can extend, the purpose being to NOT over extend a person. Yes, a higher credit score counts towards being granted a higher lending amount (based upon proven history of successful credit management). But lending institutions (primarily banks) are required to calculate your level of "overextension".

This is why there are some "paradoxes" in credit scores versus credit granting, one measure may help one, but hurt the other. The legal foundations for this were designed to help protect the consumer (from himself!).

 

I love it when such a simple question leads to such a juicy thread. One lesson to be learned is to pay down your credit card debt either way and don't have a ton of accounts that can lead to overextension. Wouldn't you say?
Search out a good lender!

 

Again, not to open the huge debate, but I was answering the "academic" question for these gentlemen. But, this opens a great point for all forum members regarding the "use" of credit.

Everyone needs to remember there is a large difference between managing your credit reports and credit score, and the actual borrowing/lending process. At the point of applying for credit, it is then that the criteria of the lender come into play. A higher credit score is always a plus, and a higher credit score DOES help towards getting higher LEGAL limits of available borrowing.

But, each lender will use different criteria for "approval", and it is a good practice for forum members to understand this. EACH lender is worried about how you will pay THEM back, not how you will pay the rest back. Depending upon the loan certain debt to income ratios will be used, types of credit (secured versus unsecured), etc.

This is a more "advanced" feature of credit management, (not credit repair!). As you become more educated about the use and management of credit, these elements start applying. You have to look at the big picture, and look at all the transactions together. You also have to "look into the future" to PLAN your credit usage.

A good education tip here is to ASK your lenders how they review and approve credit applications. I was amazed at how much information my bank gave me when I asked. They went into great detail about the entire process, laws and practices, etc. My firend that owns an auto dealership also walked me through the "auto financing" process, and I found a wealth of info there also.

The point is that "good credit" is a vague term, what matters is how YOUR credit looks to the lender you want to borrow from.

 

Most always I will go with the probabilities:

It is far more likely leaving the account open will help get the loan approved at a good rate.