Reopening Lines of Credit

Emulsifide · Joined: 25 Jan 2009 Posts: 6 Location: Northville, MI

I'm currently in the process of making my credit report look as good as it can for the purpose of taking out a mortgage for my first home. At one time, I had a total of three active credit cards in which I made timely monthly payments on and was able to pay off at different times over the past couple of years. Two of these cards I decided to close the accounts on. Those cards had lines of $5k and $2k. The third card I still have open, is completely paid off as well, and has a line of $5k.

I know the debt to credit ratio is pretty important when it comes to your credit record. Would I benefit at all by calling up the two credit card companies and reopening the two cards that I closed? I can see this being either a good thing to do in the sense of the ratio, or a bad thing due to the timing of the reopening plus the credit check pulls the credit card companies are going to do.

The $5k card account was closed back in June of 2008. The $2k card was closed in November of 2005. All three cards have credit histories dating back to the year 2000.

Thank you in advance.

m2c · Joined: 03 Aug 2005 Posts: 937

You may have to go FHA which is less FICO obsessed. Not the end of the world. FHA can be a good execution for small downpayments, folks in need of "nontraditional" credit review and so-so FICOs.

As you now realize, it may not have been wise to cancel these credit cards. Don’t you have other lines, e.g. car loan, student loan, etc. Have you run a credit report and obtained through a NONINTRUSIVE means, i.e., a method that does NOT affect FICO scores. www.annualcreditreport.com is the “official” site – one free credit report per year per repository although you’ll have to pay ($5.00 I think) for a FICO and NO HIT to your score.

Adding credit card lines within a short time of applying for a mortgage can work against you. FICO likely would take a hit for credit inquiry and new debt. Catch 22!

m2c · Joined: 03 Aug 2005 Posts: 937

Ops...forgot to mention Isaac may be coming to the rescue. FICO08 is FINALLY coming out. Only TU in near future but FICO08 may be more accomdating to your situation. Doesn't help if you want to buy immediately -- we're a number of months away for Equifax and nothing on Experian yet.

Emulsifide · Joined: 25 Jan 2009 Posts: 6 Location: Northville, MI

First off, thank you for the overnight response.

m2c wrote: You may have to go FHA which is less FICO obsessed. Not the end of the world. FHA can be a good execution for small downpayments, folks in need of "nontraditional" credit review and so-so FICOs.

I never said anything about the down payment because I just wanted the generic answer as to whether or not it would look bad to reopen the lines of credit that I already have access to. Regardless, I will be bringing roughly $12k cash to the table. I'm looking at houses in the $60k-$100k range.

m2c wrote: As you now realize, it may not have been wise to cancel these credit cards. Don’t you have other lines, e.g. car loan, student loan, etc.

I've had three 60 month car loans in the past of which all three were paid off within two years time. I currently have student loans, but none of which are in repayment mode yet (that starts this may). It's also my understanding that student loans are considered "installment debt" whereas credit cards are considered "revolving debt". This puts the two in separate categories and are looked at differently by lenders.

m2c wrote: Have you run a credit report and obtained through a NONINTRUSIVE means, i.e., a method that does NOT affect FICO scores. www.annualcreditreport.com is the “official” site – one free credit report per year per repository although you’ll have to pay ($5.00 I think) for a FICO and NO HIT to your score.

I pulled my scores via truecredit.com (TransUnion's pay service). I've read that as long as you get a report within 30 days from a reputable source, you can hand these over to your lender and they shouldn't charge you for another credit check. The scores are 686,678, and 660. All accounts on my record have always been paid on time, but I had a decent amount of revolving debt on all three cards between 2001 and 2005. I'm not sure what else I can do at this point to raise my scores since all debt aside from my student loans has been paid off.

m2c wrote: Adding credit card lines within a short time of applying for a mortgage can work against you. FICO likely would take a hit for credit inquiry and new debt. Catch 22!

The first sentence is what I was looking for. Thank you for that. To be clear, I'm not looking to incur new debt on the cards. My question was with regard to whether or not the benefit of increasing my "potential debt" ability by reopening my closed lines of credit would outweigh the pulls that will have to be made on my credit record.

Emulsifide · Joined: 25 Jan 2009 Posts: 6 Location: Northville, MI

m2c wrote: Ops...forgot to mention Isaac may be coming to the rescue. FICO08 is FINALLY coming out. Only TU in near future but FICO08 may be more accomdating to your situation. Doesn't help if you want to buy immediately -- we're a number of months away for Equifax and nothing on Experian yet.

I'm not sure what any of this means. Could you please explain? Thanks again for your advice.

m2c · Joined: 03 Aug 2005 Posts: 937

You are correct that increasing your FICO score is important, VERY IMPORTANT, in your situation. Your loan (for conventional; not FHA) would be priced on a mid-score of 678. Small problem here since have no idea if the Truecredit scores were run on mortgage-model FICO but score on other models should be close. Also I’ve never heard of any lenders accepting credit reports run for other “private suppliers” but you may find one. Anyway, assuming 678 is your representative score – with conventional at 10% down, you’d have “hits” of 2 points (1.75 for FICO and 0.25 for adverse market). A small movement to 680 would drop the hits to 1.00; 700 to 0.75. These hits do not exist for FHA but there’s always the 1.75% up front MIP. Point is not to ignore FHA even though you have some cash. Also my guess is your soon-to-start student loan payments will get a better reception with FHA than conventional – savings pattern relative to debts although overall you’ve got a good history of managing and eliminating debt.

Sadly mortgage prices are headed further south (rates going up) as we “speak”. Perhaps the implications of the “stimulus” or pseudo “stimulus” package are being absorbed. It’s very early for the debt markets to realize the “emperor has no clothes” (less than a week!) but this may be what’s happening. Bloomberg sent out a scary email CitiBank (OK, roll your eyes) on the trashing treasury market. Don’t blame mortgage brokers; we’re only the messagers. So how do YOU hedge? I’d look at “flub” members who should have the annual grant programs. Think MI should be in the Chicago FHLB area and not sure of their specific program but an Ohio member should be able to use the Cincinnati FHLB program entitled “Welcome Home”. Basically $5,000 “free” money and worth looking into what’s available in your area. You really need to sit down with a LO you can “trust” to map out a plan on real data. The flub program is just one but flub members tend to be depository institutions and LOs might not be the best informed so use caution.

FICO08 is the “new, improved” scoring model promised for some time. It should give an edge for applicants with “thin” credit although it gets a bit fuzzy on the onerous “authorized user” issue. Could be a net gain for you but its some time away.

Jenie0109 · Joined: 27 Jan 2009 Posts: 307 Location: chicago IL

this is nice!