Credit Limit & Rating

[Kavvy]

Good morning,

When typing this email out I sort of went off on a tangent on why I want a specific card, so I hid it as to not waste peoples time:

Spoiler!

I am trying to get the most bang for my buck from my credit card. I am currently with RBC I Rewards. I get 1 point for every 2 dollars I spend. It is difficult to compare travel cards to reward cards to cash back cards, so I try to scale everything to how much bang for the buck I get. I.e., with travel rewards, 100 points give me $1, so i get 0.5% cash back, but restricted to only travel.

The Aviaon card from RBC gives 1% cash back, but restricted to travel and I believe you have to use there redemption schedule, meaning if you find a better deal then the max purchase price of a ticket (which is the 1%), the bank still charges the same amount of points for the tickets.

So I decided I wanted a cash back card, money is better then rewards. Based on my spending habits, the Scotia $99 cash back card is the best for me and I was wondering if people could clear up a couple credit rating misconceptions for me:

• According to Wikipedia (for the US), the age of your credit affects your credit rating. The age is dependent on your average age of credit open, and the oldest account you have on your credit report. I am switching banks, so my plan was to use the new cash back card as my primary, but leave the old account active to keep my "credit age" as old as possible. Does this make sense?
• I was going to lower my old credit card limit to $1000-$2000 to reduce my open credit. However, I read that having large credit over a long peorid helps your rating. My plan would be to lower it prior to getting pre approved for a bank mortage. Does this make sense? Does haveing credit you don't use hurt the rating?

Thank you!

Kavy

[GP_Matt]

Take a look at the new MBNA World Points World card.
The second World is the key there, but it is a 2% cash back card.

I don't think anyone can say for certain how the credit bureaus calculate your credit as I am pretty sure they consider their formulas proprietary.

[Kavvy]

Originally Posted by GP_Matt

Take a look at the new MBNA World Points World card.
The second World is the key there, but it is a 2% cash back card.

I don't think anyone can say for certain how the credit bureaus calculate your credit as I am pretty sure they consider their formulas proprietary.

Thanks for the tip, but I had a bad experience with MBNA and would prefer to stay away from these guys!

[GP_Matt]

Fair enough, I always get the feeling like they are trying to trick me into something (insurance and cash advances mainly) but I don't think you can beat their rewards program.

[Kavvy]

Originally Posted by GP_Matt

Fair enough, I always get the feeling like they are trying to trick me into something (insurance and cash advances mainly) but I don't think you can beat their rewards program.

ha I know the feeling

[Cecil Terwilliger]

Originally Posted by Kavy

Good morning,

When typing this email out I sort of went off on a tangent on why I want a specific card, so I hid it as to not waste peoples time:

Spoiler!

I am trying to get the most bang for my buck from my credit card. I am currently with RBC I Rewards. I get 1 point for every 2 dollars I spend. It is difficult to compare travel cards to reward cards to cash back cards, so I try to scale everything to how much bang for the buck I get. I.e., with travel rewards, 100 points give me $1, so i get 0.5% cash back, but restricted to only travel.

The Aviaon card from RBC gives 1% cash back, but restricted to travel and I believe you have to use there redemption schedule, meaning if you find a better deal then the max purchase price of a ticket (which is the 1%), the bank still charges the same amount of points for the tickets.

So I decided I wanted a cash back card, money is better then rewards. Based on my spending habits, the Scotia $99 cash back card is the best for me and I was wondering if people could clear up a couple credit rating misconceptions for me:

• According to Wikipedia (for the US), the age of your credit affects your credit rating. The age is dependent on your average age of credit open, and the oldest account you have on your credit report. I am switching banks, so my plan was to use the new cash back card as my primary, but leave the old account active to keep my "credit age" as old as possible. Does this make sense?
• I was going to lower my old credit card limit to $1000-$2000 to reduce my open credit. However, I read that having large credit over a long peorid helps your rating. My plan would be to lower it prior to getting pre approved for a bank mortage. Does this make sense? Does haveing credit you don't use hurt the rating?

Thank you!

Kavy

The first one is a little tougher to answer. What I can say is that new credit that has just recently started reporting won't be as beneficial as if you had credit for say 10 years. So I guess the answer is yes, the age of your credit is a good thing.

I can't say for certain if leaving the older card open is going to help. It might be more important of when you first started reporting, not the specific age of your individual credit facilities. Even I'd have to ask someone with more experience on how credit reporting works to know if you should leave open the old card. It is fairly complicated how they come up with your credit score.

As for the second part, you will find that each institution will view open credit differently, this is in addition to how your credit bureau will be effected by open credit. If you have too much open or available credit your it will hurt your bureau a bit but not too much. Basically a note appears on your bureau that says "too many open credit facilities" or something similar. But it isn't like you're going to go from an 800 to a 600 because of one extra $5k credit card with a zero balance. Always remember, open credit with zero balance is WAY better than credit that is maxed. (this should be obvious) If you have $40k in open credit (be it LOCs or CCs) all with zero balances, that is better than $20k in debt, especially if it is all credit card debt.

Again, each institution will view it differently. I've heard some will take 2-3% of all your available credit (LOCs, CCs) and calculate that into your debt servicing (the calculation we use to see if you can afford the loan you're applying for), some only use the existing balance, some use a combination (limit for CCs, balance for LOCs).

At the end of the day I wouldn't be too worried about a $1-3k credit card being open or closed. If you have four $10k credit cards I would encourage you to close a few, especially if they have large balances. If they're all at zero it won't be too bad but you still might get that "too many open credit facilities warning".

Having too much credit will hurt your rating. Having enough credit that is reporting will help your rating. It is kind of a fine line.

You should be far more concerned with your outstanding debts/liabilities than your open credit. Avoiding collection items, bankruptcy and late payments is also very important. I would also rate your cash flow as more important than available credit. Having an extra CC with a zero balance but a $3k limit that you save for emergencies will be much less important than your cash flow, net worth, outstanding debts etc.

As long as you have good credit history I wouldn't worry about the minor details because a 10 point difference in your credit rating won't be the difference in you getting approved or not, unless you're totally borderline.

I would suggest going to equifax's website and paying $20 to pull your credit right now. Get an idea of what it looks like before you even apply for the mortgage.

Google a debt servicing calculator and run the numbers for your potential monthly payments vs income. Most websites will give you a good breakdown of what to include. There are two debt servicing methods. Shelter/income and shelter plus other debts/income. Both are calculated using monthly payments and income.


If this is your first mortgage and you have RSPs make sure you look at the Home Buyer RSP w/d plan.

[Kavvy]

Originally Posted by Cecil Terwilliger

If this is your first mortgage and you have RSPs make sure you look at the Home Buyer RSP w/d plan.

Thank you for all the info. Based on a prior comment of yours I pulled my credit report last summer and closed a $500 MNBA account.

So it looks like I am micro managing something way to much, as per the norm of my life! ha

[Cecil Terwilliger]

Originally Posted by Kavy

Thank you for all the info. Based on a prior comment of yours I pulled my credit report last summer and closed a $500 MNBA account.

So it looks like I am micro managing something way to much, as per the norm of my life! ha

I'm happy to help (or at least try).

I'm relatively new in this industry and learn new things every day so don't take anything I say as gospel. There are a few other financial posters on CP and they probably have way more knowledge than I do. There are still things that I need clarifying with regards to how it reports on a bureau.

Good for you to be on top of things. Lots of people aren't very much in tune with their own financial situation. I think it is easier to turn a blind eye to things, especially if they aren't all that rosy in outlook, than it is to work on improving your credit and staying in a financially viable situation.

Moderation in all things...

Have enough credit to get a good rating, not so much that you appear on the verge of bankruptcy. Pay on time and be responsible. At the end of the day if you have too much credit your bank may just ask you to close something. Unless you seem like an obvious credit seeker your credit rating will probably be fine.

[spetch]

Originally Posted by Kavy

The Aviaon card from RBC gives 1% cash back, but restricted to travel and I believe you have to use there redemption schedule, meaning if you find a better deal then the max purchase price of a ticket (which is the 1%), the bank still charges the same amount of points for the tickets.

Incorrect as you can buy merchandise too along with travel, however the merchandise usally doesnt give you the bang for your points.

Also, they don't tell you this and depending on the person you get they might not know right away, but if you find a deal there is a way you can get your ticket including taxes buy using less points then their "schedule".

for example: I can find a round trip flight to vegas for $320 including taxes. For Cgy to Vegas the schedule says it costs 35,000 points + taxes up to $750 bucks. The thing they don't tell you is that you can use 100 points per dollar. So you buy $320 for 32,000 points, which covers your flights AND taxes.

You just have to tell the person you are booking with to do it and they can do it that way. They will try to tell you they can't but they always seem to find a way to do it, whether it be booking one way tickets or talking to a supervisor.

[Kavvy]

Originally Posted by spetch

Incorrect as you can buy merchandise too along with travel, however the merchandise usally doesnt give you the bang for your points.

Also, they don't tell you this and depending on the person you get they might not know right away, but if you find a deal there is a way you can get your ticket including taxes buy using less points then their "schedule".

for example: I can find a round trip flight to vegas for $320 including taxes. For Cgy to Vegas the schedule says it costs 35,000 points + taxes up to $750 bucks. The thing they don't tell you is that you can use 100 points per dollar. So you buy $320 for 32,000 points, which covers your flights AND taxes.

You just have to tell the person you are booking with to do it and they can do it that way. They will try to tell you they can't but they always seem to find a way to do it, whether it be booking one way tickets or talking to a supervisor.

Interesting, did not know that. Will have to tell my family that uses it, that's why better. Still not crazy on the 1% return rate which isn't cold hard cash, but that is my preference.

[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

[Travis Munroe]

A skimmed the first page and didnt see any mention of -
It is ideal to never go past 80% of your available credit on each card. If you do make sure it is paid off at months end.

[Cecil Terwilliger]

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

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?

[8sPOT]

Some excellent points made thus far. If you are concerned about maintaining the best score possible I suggest getting a Trans Union Canada report. It will show you, as an individual the top 5 reasons your score is what it is, and the top 5 ways you can improve it.

Realtor1 mentioned you shouldn't owe more than 80% of the limit of any revolving credit, I would say you should never owe more than 50% for any length of time.

Also, there is not a huge difference between having a score of say 810 and 690. As long as you are above 680-ish you should have no problems getting approved and qualifying for a free down payment mortgage if neccessary.

Like many have said, the worst thing you can do is miss payments. Even a couple days late CAN hurt your score, depends on the credit issuer.

As far as the Scotia moneyback card, I'm assuming you mean the Momentum Infinite card. You get the biggest bang for your buck if you purchase ALL gorceries, gas, drugs (pharmacy, not street ) and have recurring bills paid using the VISA card. You get 4% on the gas and groceries, 2% on drug store and recurring bills and 1% on everything else. The annual fee is $99, so spending $207 a month on gas alone will give you $99 back each year. The interest rate is 20% though so you don't want to carry a balance on it, in fact all the rewards type cards should not be used to carry a balance.

[Kavvy]

Originally Posted by 8sPOT

The interest rate is 20% though so you don't want to carry a balance on it, in fact all the rewards type cards should not be used to carry a balance.

I have been very lucky in my life so far to have never paid a dime of interest, but it is good to keep in mind!

Thanks for the info!

[bc-chris]

Originally Posted by Cecil Terwilliger

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.

....

Or if he has $40k in open credit and refuses to close it to get the loan approved then who's fault is that?

Cecil

i think Pizza's reasoning had more to do with this:

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.

this is from my own personal experience 6 or 7 years ago when my wife and i were in the process of getting our house built ...

we met with the banker/mortgage guy to see how much of mortgage we would qualify for. after crunching some numbers he told us we would be able to get 'x'. if we wanted more, one thing we could do is close the $20K line of credit we had (we originally got the LOC shortly after buying our first place, paid it all off to a zero balance just let it sit there for 5 years)

i'm no banker but i think their thought process is something like this:
- bc-chris & his wife have this much income and they can safely afford 'x' dollars to be paid to debt every month
- they currently pay/have available 'y' dollars every month for current debts (CC's, LOC's, etc)
- so they can afford a monthly mortgage payment of x-y, which translates into 'so much' over 20 years (again.... very simplistic example)

but the more credit you have available to you the more you can potentially owe every month, and that can affect how large of a mortgage you are able to get approved for.


we ended up toasting the LOC and 1 credit card (one that we never used), thus reducing the 'potential debt' we could acquire. as a result we were able to increase our mortgage

[Deegee]

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.

Depends on the financial institution.

We don't worry about the unused, open Line of Credit, unless the available credit is substantial.

Then we only worry about it depending on history, debt serviceability, and overall character of the borrower.

Credit adjudication is a lot a grey area and few black and whites.

[Kavvy]

Originally Posted by fotze

I have never met anyone who was unable to get a mortgage due to their credit. Does it happen often. I have found that having good credit is over rated. Banks will give a mortgage to a dalmation it seems.

I haven't done any shopping as of yet, but from my understanding, it seems that unless your in a tight spot, great credit = good credit = above average credit (again, from no experience). I only say this because when I met with the bank to discuss pre-approval a year ago (didn't end up buying, and would have used a broker if I was serious), the rates they wanted to give me were the ones I could google and find on there site, so my credit didn't matter (assuming a minimum level of good credit I imagine).

When I asked how much I could borrow, it was pretty much the max the Government of Canada income over debt ratio would give me, whatever that ratio is called.

Edit: same ratio as pizza mentioned above.... Debt-Service Ratio " The percentage of the borrower's gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees." (I think condo fees count at 50% for some reason)

Thank you for all the tips everyone!

[Cecil Terwilliger]

Originally Posted by bc-chris

Cecil

i think Pizza's reasoning had more to do with this:


this is from my own personal experience 6 or 7 years ago when my wife and i were in the process of getting our house built ...

we met with the banker/mortgage guy to see how much of mortgage we would qualify for. after crunching some numbers he told us we would be able to get 'x'. if we wanted more, one thing we could do is close the $20K line of credit we had (we originally got the LOC shortly after buying our first place, paid it all off to a zero balance just let it sit there for 5 years)

i'm no banker but i think their thought process is something like this:
- bc-chris & his wife have this much income and they can safely afford 'x' dollars to be paid to debt every month
- they currently pay/have available 'y' dollars every month for current debts (CC's, LOC's, etc)
- so they can afford a monthly mortgage payment of x-y, which translates into 'so much' over 20 years (again.... very simplistic example)

but the more credit you have available to you the more you can potentially owe every month, and that can affect how large of a mortgage you are able to get approved for.


we ended up toasting the LOC and 1 credit card (one that we never used), thus reducing the 'potential debt' we could acquire. as a result we were able to increase our mortgage

I get that part, I'm just not sure why that means he disagrees considering I posted something almost exactly the same, with slightly less detail. Perhaps there is something else I'm missing.

[Deegee]

Originally Posted by Kavy

(didn't end up buying, and would have used a broker if I was serious)

Be careful of some really good rate options. Inquire as to renewal fees and prepayment penalties. For example, I think BMO runs a really excellent 5 year rate, but there are absolutely no prepayment possibilities.

If you want to land your mortgage at a bricks and mortar FI, but still get a great rate, look for Credit Unions that have excess liquidity from their balance sheet online (more deposits then loans) and you can usually get a sweet deal.

Secondly, shop around your lawyer fees a bit. They can vary quite a bit. Most around here are about $1,500 for a purchase, but I refer most of my business to a guy who is about $800 taxes in.