Optimum debt to credit limit ratio?

sfax

This a repost but I didn't get any response on the Credit Report thread, so I'm just trying one more time....


Any thoughts on whether it is better to close a credit card account account with a £0 balance and a £10,000 limit before applying for a new BT credit card? There seem to be two conflicting schools of thought:

1. Close the account and decrease the total amount of credit available to you to make you less of a risk to the new lender in terms of how much debt you could potentially get into

2. Keep the account open because this keeps your debt to credit limit ratio lower which is looked upon favourably by lenders

Is there an optimum debt to credit limit ratio for credit cards or a ratio that you should aim to stay below (e.g. 80%)?

Also, does a low limit (£750) store card have much affect on your credit score if not used (£0 balance)? Is it worth closing accounts like this before applying for new credit cards?

Thanks in advance for any help

InsideInsurance

The problem is there is no Rules, every lender has its own set of criteria and what one likes another hates.

You can therefore only talk in generality and I doubt there are many here (me included) that have worked for a dozen lenders or more to get a broad spectrum view of the different underwriting guidelines for different brands etc.

In general most would argue the ratio should be below 60% but potentially should be above 30%

In general it is worth closing low limit accounts assuming they dont make a material difference to your ratio. Generally a couple of large facilities is seen better than a whole host of tiny ones even if the total limit is the same.

Remember agencies only receive updates once a month from lenders and lenders may start the preparation for reporting several weeks before that meaning that if you closed the account today it may still show as being open in almost 3 months time according to the CRAs

sfax

InsideInsurance wrote: »

The problem is there is no Rules, every lender has its own set of criteria and what one likes another hates.

You can therefore only talk in generality and I doubt there are many here (me included) that have worked for a dozen lenders or more to get a broad spectrum view of the different underwriting guidelines for different brands etc.

In general most would argue the ratio should be below 60% but potentially should be above 30%

In general it is worth closing low limit accounts assuming they dont make a material difference to your ratio. Generally a couple of large facilities is seen better than a whole host of tiny ones even if the total limit is the same.

Remember agencies only receive updates once a month from lenders and lenders may start the preparation for reporting several weeks before that meaning that if you closed the account today it may still show as being open in almost 3 months time according to the CRAs

Thank you for your reply. That's about what I was after really. I know lending criteria vary but I've been trying to crack the code and put myself in the best position before applying for more credit cards and I have some decisions to make with £0 balance cards.

I'll wait until Experian and Equifax both show the agreements as closed and all balances updated before making a new application.

On a side note, I did consider making two applications simultaneously so that each prospective lender gets the same picture without seeing the newly available credit in the other application (one would probably only see the search of the other). You could potentially get a higher total credit limit this way than by making the applications one or two months apart

bengalknights

Usually anything lower than 40% should be good

InsideInsurance

Again, it depends.....

If you were the perfect rich client and applied for something which has an initial limit ( Eg Capital 1 Aspire World max initial limit 7.5k) and a card that has no maximum initial limit then you'd be better off letting the unlimited issuer see that the limit given isnt massive -v- seeing an application and not knowing if that will be 7.5k or 20k

The one thing underwriters dont like is uncertainty

sfax

InsideInsurance wrote: »

Again, it depends.....

If you were the perfect rich client and applied for something which has an initial limit ( Eg Capital 1 Aspire World max initial limit 7.5k) and a card that has no maximum initial limit then you'd be better off letting the unlimited issuer see that the limit given isnt massive -v- seeing an application and not knowing if that will be 7.5k or 20k

The one thing underwriters dont like is uncertainty

Good point that. I was only thinking of keeping the total visible credit available lower but I can see how an unknown new account may not go down well. I guess waiting for the first application to complete could also result in a more favourable debt/limit ratio depending on what position I start from. Back to my spreadsheet for some more modelling! Thanks

Experian_company_representative

I wrote a Q&A recently on this with advice on closing old cards and optimising balance-to-credit-limit-ratios, here. Hope it helps.

James Jones

sfax

Thank you for all of your help. I went for a cheeky application now before my report shows the recent account closure, balance transfer and new acccount that I've opened. Debt/Limit ratio currently 41%. Was accepted online immediately for a Tesco 22 month balance transfer card but only got a £7,000 limit. I seem to be able to easily get 4-5 cards with limits of around £7k but I'd prefer to just have one card for purchases and one higher limit card for balance transfers - and a lot less juggling! Makes it all interesting at least

opinions4u

Is there an optimum debt to credit limit ratio for credit cards

Nil, surely?

_Andy_

36.54% is the norm

sfax

Easy to see how that Thanked count gets so high