Quote:
Originally Posted by Pizza
I strongly disagree with Cecil on Open credit
Despite having a zero balance on revolving credit like a credit card or a Line of Credit, it will play a major factor in debt service ratio. So going back to his example with someone with a $40k limit but having a zero balance compared to someone who is in debt $20k on a loan, the person with the $40k limit will have a harder time getting approved. The reason for this thinking is that the banks want to protect themselves from lending to someone who's unable to pay back. They will always consider the worst case scenario where if you decide to max out your credit facilities like your Credit cards and LoCs, they want to know if you're able to pay back their loans as well.
if you're wondering how Total Debt Service Ratio is calculated:
(payments of existing loans + min payment of potential maxed out revolving credit + rent/mortgage + other major payments)
/
household income before tax
at some banks, the most they`ll approve you on is 38-40%. Others may take on that risk on a higher ratio but will make you pay a higher interest rate
keep in mind that when getting approved for future loans, the institutions look at credit rating as well as your debt service ratio. They will also look at other things too like what other business you have with them, how long you've been a known customer with them. Having existing investments like RRSPs plays a minor factor too
This is all assuming that you're applying at a major Canadian bank and looking for a LoC, loan or mortgage. Some credit card companies arent too worried with all of the above factors
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So which part do you strongly disagree with me on? I'm confused. Everything you posted is almost verbatim what i posted already. And what's more confusing is how you could possibly disagree that open credit at zero balance is WORSE than actual debt.
The only thing I can find is my example of $40k in open credit with no debt vs $20k in debt. I never once mentioned who I thought would have an easier time getting approved because that's not what he asked, he asked if it would hurt his credit rating. That being said, the person with $20k will not have an easier time getting approved, all the $40k guy has to do is close some of his open credit facilities (a phone call usually works), the $20k guy has to pay down or pay off his debt, whcih is not easy. Again, you think having $20k in debt is better than having ZERO debt? I'm not sure where you got that idea.
Furthermore, as I already said regarding that example, some institutions calculate it differently. I made it abundantly clear that some will use limits and some use balances. And on top of all that I used an extreme example. In Kavy's case it sounds like we're talking a few thousand dollars available on a credit card, not a $40 HELOC.
And that is exactly the point I was trying to make to Kavy, unless he's got tens of thousands of dollars in open credit, don't worry about it. Calculating 3% on a $3000 credit card shouldn't be the difference between approval or decline. And if it is then you're obviously on too tight a budget as it is.
Or if he has $40k in open credit and refuses to close it to get the loan approved then who's fault is that?