Is Bank of America giving wrong advice ?
Here's what happened.
I went to a Bank of America location to inquire about mortgage rates. I started talking to a Financial consultant there, about what kind of a rate can I get for a 30 year fixed loan, given that my credit score is 790 and I pay off my credit card bills in full each month.
She started by asking me how much of a credit limit do I have on my credit cards. I told her that my 3 credit cards combined, I have $30000 at my disposal. She then said that to get a better interest rate I should close one or 2 credit card accounts...something about debt to income ratio !!
Everywhere I have read that stop using credit cards but never close credit card accounts!!
Am I wrong here ??
So, to find out more I posed this question to the fine bloggers at the Money Blog Network.
Jeremey at Generation X Finance had this to say:
"They clearly don't understand what a debt-to-income ratio is, since that is how much debt you actually have and are making payments on, relative to your income.
It certainly would not be to your benefit to close an account that has a long history, as credit history does make up a sizable portion of your credit score.
I could see if someone had about 15 credit cards and over $150,000 of available credit may benefit from slimming down the number of cards a bit, but since you already have a high score and a relatively low amount of available credit, there shouldn't be any reason to close a card for a better mortgage rate in your situation."
This is what I thought too, but then Mrs. Micah at Mrs. Micah: Finance and Life had this to say:
"Debt-to-income ratio may not be the right phrase, but this is a normal part of getting a mortgage. I think she meant possible debt-to-income.
It's the amount of credit available that some lenders find worrying. They're taking a risk on you. So if they agree to give you a $100,000 loan but you can also take on another $30,000 of debt, that makes them nervous that you will. Maybe to furnish your new house.
You're a bigger risk than the same person with only $10,000 of available credit. So you'd have a slightly higher interest rate.
In most cases your debt-to-credit ratio is very important. But mortgages are the only time (I know of) when having plain old available credit can hurt you.
Don't close the card but maybe get the credit limits lowered a bit? Perhaps by $5000/card. Tell them it's because you're trying to get a mortgage. This may allow you to get it raised again after the mortgage goes through.
If your annual income is $200,000 or more, this probably wouldn't matter. In theory, such people could handle a mortgage and $30k of credit card debt. I'm not sure how low you can get before it does start to matter. "
So, who is right ??
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