Closing credit cards/reducing credit limits - an opposite view

The_Boss

Moggles wrote:

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Obviously individual circumstances vary. There are no hard and fast rules but, IMO, MSEs need to weigh income as against the used and available credit at their disposal. As with so many things, it's all about balance and moderation.

I've not actually touched on income, but I will say this (and I've had my job and bank account for years).

Before I closed my cards/reduced credit limits, I was easily getting credit even though my total credit limits were considerably over my £17k salary. In fact with £30k of available credit, my salary worked out to about 56% of my credit limits!

Now my total credit limits are the equivalent to just over 50% of my salary and I keep getting rejected. Its quite a turnaround and by itself does not make sense. But when you look at before and now, the ratio of used to available credit has changed massively. Last year I'd say it was around 20% - now due to all the changes its in the early 80%s.

Clariman

Moggles wrote:

Thanks once again, Boss, for posting to help others.

Why are some people so keen to reduce their credit limits? This is not a strategy mentioned in any of Martin's articles!

In 10 years of credit card shuffling with more than 30 cards - not all at once of course - I have never, ever reduced a credit limit. (For an explanation, please see #27) and I have cancelled a card only after careful thought.

Obviously individual circumstances vary. There are no hard and fast rules but, IMO, MSEs need to weigh income as against the used and available credit at their disposal. As with so many things, it's all about balance and moderation.

Moggle - you are quite correct. It is all a question of balance.

It is difficult to be definitive in credit scoring because each lender has their own rules and policies and because there are conflicting factors. This thread has discussed the pros and cons of closing cards and you have asked why people often close cards down. This brings us to the heart of one of the conflicting factors.

Amongst the many criteria that are used by a lender, there are two important ones which conflict with each other:

1. The total amount of available credit that you have (i.e. the total of the credit limits on all the cards you have that are not settled). Even cards that you are not using will get included in this figure. The higher the available credit you have in relation to your income, then the less likely you are to get good credit limits in the future. This is a driver to close down unused cards.

2. The percentage of your credit limit that you have used. If you have maxed out all your available credit, then you may appear to a future lender as someone who is really struggling to make ends meet and is desperately in need of additional headroom in credit limits. This means that you could be higher risk and they may decline you. This factor is a driver to keep cards open with nil balances !

So how do you position those 2 factors and where is the trade-off ? That's a tough call but, based on my research, I think the former is more important than the latter. If you have a lot of available credit then that is going to be a showstopper before the second one is. It is all a question of balance.

I mentioned my research. This has been based on following credit card and stoozing discussion boards for about 4 years, running the stoozing website, direct discussions with Experian and a professional credit manager in the industry (the latter two on behalf of the stoozing website).

The way I strike the balance personally, is to max out 4 or 5 stoozing cards, and to have 2 purchase cards with a combined credit limit of £13,000 which rarely have more than £3,000 on them. So while I have some cards maxed out cards, a lender can always see that I have some headroom. However, I close my stooz cards down immediately when I no longer use them.

I should add that one of the other reasons for closing down unused cards is that it makes you less prone to identity theft.

I documented all this in an article on credit-scoring for stoozers and rate tarts which you can find here. We also ran a Q&A session with Experian and the question of closing down unused cards was specifically asked. The Q&A session can be found here.

Clariman

Moggles_2

Thanks for your feedback, Clariman

you have asked why people often close cards down.

I was talking about voluntarily reducing the credit limits, not cancelling cards. I believe it's important to stress the difference.

Some people here seem anxious to lower the limits of individual cards. I wonder where this notion has come from? This is not a strategy mentioned in any of Martin's articles!

Closing a card leaves a record on your credit file which persists for 6 years and, providing the payment record is good, contributes positively to your credit score.

In contrast, a request for a lower credit limit, leaves no record of the higher one. Consequently, those searching your file, see a longstanding customer with a low-limit card or, where the card's in use, a customer who has borrowed the maximum allowed on a low-limit card! This may signal over-commitment.

The_Boss

Clariman - just wondering - what do you think about the point I made regarding salary above? When my limits were over 100% of my salary, people were more than happy to keep giving, but now my limits are 50% of my salary, its not been possible (even on an account where I requested a small increase in limit when I previously had a credit limit twice the size of that).

Clariman

The_Boss wrote:

Clariman - just wondering - what do you think about the point I made regarding salary above? When my limits were over 100% of my salary, people were more than happy to keep giving, but now my limits are 50% of my salary, its not been possible (even on an account where I requested a small increase in limit when I previously had a credit limit twice the size of that).

I don't know is the honest answer to your question. I would be doubtful if your recent rejections were directly related to closing down cards, unless the closure of these cards has led to your remaining available credit being maxed out. My guess is that it would either be (a) a tightening of lending policies over recent months as there are inflationary pressures and an increase in interest rates or (b) other factors such as the number of recent applications you have mode or (c) your recent applications have been to lenders who have tougher criteria.

Clariman

The_Boss

Ok - so how do you defined maxed out? Over 95% of limit? I'm obviously not applying for any more cards and working on reducing my overall levels until my cards are around the 60% mark before reapplying. Shame, as I could really do with that M&S card, but with an average of 81% per card it would be a waste of time applying now.

Clariman

The_Boss wrote:

Ok - so how do you defined maxed out? Over 95% of limit?

As I said, it is difficult to be definitive because each lender is different. It is not black and white but, IMHO, 95% would be close to "maxed out" and 81% would be quite high but not maxed out. I'm not convinced that is your problem though. With credit limits at approx 50% salary and debt usage a 81% of those, then your debts are about 40% of your salary. I don't think that would be a major concern to most lenders unless there were other factors. Which lenders have rejected you recently, how many apps have you made in the last 4 months and what cards do you already have or have closed down in the last 9 months ? .... and I'll see if I can come up with any other theories if you like.

Clariman

The_Boss

Ok, this is it

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 limits went from £30k to around £10k.


My credit file shows the following seaches in the last 12 months

Halifax mortgage : 1st October 2005
HSBC : 21st November 2005
Sainsburys Bank (loan) : 23rd December 2005
egg money credit card : 27th march 2006
GE Capital : 5th May 2006
Capital One : 7th July 2006

The rejections came from HSBC, Sainsburys Bank, egg money, GE Money and Capital One as well as a recent open ended request for larger credit limit from MBNA. As you have seen, I previously had accounts with Capital One and egg that were managed flawlessly. I am on the electoral roll, lived here all my life, long term job etc.

The_Boss

Also, I have a Blackhorse 0% car loan, paying £160 a month with £3.5k left to pay over the next 22 months. I've not mentioned it before, as this has been on since June 2004, and since the debt has been reduced over time the balance is half of what it was back then when my applications regularly suceeded.

Clariman

So if I understand correctly. Your current cards are Halifax (£1700), BMI/MBNA (£2000), Morgan Stanley (£2000). You have a new mortgage from Halifax from 1st Oct 2005. You closed quite a few cards down before remortgaging in 2005. Now you said that you credit limits totalled just over 50% of your salary, so there must be another £3000 or so somewhere? Looking back to an earlier post I see you had a £3400 NatWest card too which looks as if it may be still open.

I also see from that earlier post that your mortgage application was also turned down. I can see why you are frustrated.

Clearly your earlier credit limits (£30,000) were substantially above your salary so that could have become a problem if lenders were tightening up. You closed some cards down not far in advance of your mortgage application so it is conceivable that some of those had not fed through to your credit report at the time. It is none of my business but were you looking to do a debt consolidation with your mortgage application? Perhaps that followed by a loan application and subsequent card applications has been setting of alarm bells with lenders???

Is everything else OK on your credit file ? No missed payments ? No errors, no late payments etc ?

I would be surprised if the card closures had had a negative impact on your credit rating to be honest.

Clariman