Closing credit cards/reducing credit limits - an opposite view

The_Boss

I'd like to put the opposite view that cancelling cards/reducing credit can be BAD for your credit score.

This time last year, these are the cards I had and when they were opened

Morgan Stanley - £5500 limit (opened may 2001)
bmi MBNA - £6000 limit (opened september 2003)
Virgin MBNA - £300 limit (opened February 2002)
Capital One - £8000 limit (opened July 2004)
NatWest - £3400 limit (opened November 1997)
Lloyds TSB - £3500 limit (opened January 2005)
Egg - £1400 limit (opened september 2001)
Barclaycard - £1700 limit (opened december 04)
Creation finance (Burtons) card - £200 limit (opened June 1999).

Total available credit March 2005 = £30000


I wanted to apply for a mortgage, so decided to have a card clearout. This was the cull. For the record, my application for mortgage was rejected.

Virgin MBNA - closed July 05
Egg - closed July 05
Capital One - reduced limit to £1k in July 05 and then closed October 05
Creation finance - closed november 05
Barclaycard - closed July 05
Lloyds TSB - closed January 06

Reduction in credit limit - Morgan Stanley to £2000 in September 05 and bmi MBNA to £2000 in September 05

Also opened a Halifax 1 card in July 05 with a £1700 limit.

Total available credit March 2006 - £9100
Total difference in credit = £-20900.
The above closures are all reported on my credit reports.

I have never missed a payment on anything and my credit forms reflect this. Yet I have been rejected for an Egg money card yesterday, HSBC card in January and Sainsburys Bank loan in december. I never had a previous rejection when I had high credit limits.


So what is to blame? Well, personally I think reducing credit on a card is a bad idea. I'd go straight to cancelling it - as it probably looks better that you have had a good long repayment history with a high credit limit. I'm sure lenders look at my report and see that I have had bmi MBNA and Morgan Stanley cards for many years, yet only have low credit limits, therefore something must be wrong - as why would they not be granting me increases in limit? Also same with Capital One - it looked like I was given a low limit rather than a high one which then was cancelled.

Searches are not an issue - last 6 months I only have 4 spaced out applications recorded.


What The Boss advises

1. If you have several cards that you really want to close, maybe close one per month rather than all at once.

2. Do some maths before closure. Work out your current total used credit and total available credit, then work out the used as a percentage of available. So if you owe £6k and have total limits of £10k, then you currently have used 60% of your available credit. Now work out what the totals would be if you closed a few cards. If the new percentage is greater than 70%, I would advise not closing so many cards.

3. Lenders dont like to see people up and around their limits, so if you are rate tarting or stoozing its useful to keep one or two cards with a zero balance as it shows that you are not desperate for the money as you would have used these empty cards if you were.

4. Dont reduce credit limits if you plan on closing the card anyway.

5. Dont reduce credit limits if the same logic in number 2 follow.s

LongDongDave

The_Boss wrote:

So what is to blame?

If you listen to the Banks trading statements, they are increasing their "provisions for BAD debts", when this happens they will batten down all the hatches...

The_Boss wrote:

Well, personally I think reducing credit on a card is a bad idea. I'd go straight to cancelling it

Perhaps you are right, because they probably look at the overall credit available and number of providers. Ages ago they (credit card providers etc.) didn't really check your income, you could put what ever on the application and they accepted, now with the new credit reference agency (callcredit) they can get an idea of what goes into your main bank a/c and this will also affect their decision.

The_Boss

So what is 'bad debt'? Is that current balances on credit cards/loans or the inability to pay back?

LongDongDave

The_Boss wrote:

So what is 'bad debt'? Is that current balances on credit cards/loans or the inability to pay back?

When the providers make a "provision for bad debt" they are covering themselves against people who are behind with payments or who have missed the odd few payments...when this happens they have to report to their share holders and it turns into a "credit squeeze", to improve the situation for the next reporting period. This can happen to personal borrowers or businesses. They will be more stringent with their lending critera. This always comes and goes in cycles...first there's "loads" of money out there to be borrowed (mortgages, credit cards, personal loans, etc..) then they cut back and it will hit someone like you who may or may not have had broblems servicing their debt.

Slayerx

Intresting view if its right I could be in trouble as I have just closed 2 cards.

As of Dec 2005

Egg limit 1400
HSBC limit 1200
Halifax limit 1400

I've now paid and closed the Egg and HSBC card as I assumed it would look good it would show I consistently paid them back over however many years and closed them in full without missing a payment.

YorkshireBoy

There's an article on the stoozing website on credit scoring.

On page 6 of the article, the question "should I close down a card when I've finished with it?" is asked.

The_Boss

YorkshireBoy wrote:

There's an article on the stoozing website on credit scoring.

On page 6 of the article, the question "should I close down a card when I've finished with it?" is asked.

I've read that, and this is the opposite view to that based totally on experience. Though I'm starting to go along with the "percentage of used credit" being the most important factor.

Clariman

I've read that, and this is the opposite view to that based totally on experience. Though I'm starting to go along with the "percentage of used credit" being the most important factor.

Although I wrote the article about credit scoring that YorkshireBoy posted, the information came from Experian and from a credit professional who manages a lending fund (not credit card) and has previously worked in credit scoring. As you can see there is a conflict between having a lower amount of "available credit" and minimising the "percentage used of credit", but it is all a question of balance I think.

Clariman

The_Boss

Damn Clariman. That would have been a good question to ask Experian.

"If you have several settled accounts with high credit limits on your record, are you given any more benefit of the doubt than if the credit limits were a lot lower?"

Chrysalis

LongDongDave wrote:

If you listen to the Banks trading statements, they are increasing their "provisions for BAD debts", when this happens they will batten down all the hatches...


Perhaps you are right, because they probably look at the overall credit available and number of providers. Ages ago they (credit card providers etc.) didn't really check your income, you could put what ever on the application and they accepted, now with the new credit reference agency (callcredit) they can get an idea of what goes into your main bank a/c and this will also affect their decision.

hmm whats callcredit?

do they know what is deposited in people bank every month?

do the public have access to callcredit reports on themselves?

lisyloo

hmm whats callcredit?

Call credit is a 3rd credit reference agency (in addition to Experian and Equifax).
Not many companies use call credit, so in general the advice is to get Equifax and Experian credit reports.

do they know what is deposited in people bank every month?

I am not aware of this, but perhaps the other poster knows more than me.

do the public have access to callcredit reports on themselves?

Yep, statutory reports are £2 each (per agency) and come by post (about a week).
You can get instant reports on line but that's about £9.