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Available credit, BT and credit limits
Don80
Posts: 300 Forumite
Some of the recent threads have had me wondering...
I know most advice is that you shouldn't have a total credit limit above your annual salary, and that credit utilization shouldn't be more than 30%. But trying to understand how this works, what about this scenario (totally fictitious numbers for ease of explanation!):
Three people have a debt of £6000 on various credit cards, all near the limit. They all take out a BT card, are offered a 0% £4000 limit and transfer £4000 to the new card from older cards. This gives a new overall credit limit of £10,000. They all earn the same, and have the same rent, mortgage, utility bills etc.
Person A then closes the old accounts which pushes the utilisation back up to near 100% - but still, financially they're in a better situation, more of what's being paid each month clears the interest bearing debt.
Person B is in the same situation, but doesn't close the old accounts. They are financially in the same situation, only now they have an overall utilisation of 60%.
Person C has lots of cards with smaller limits and transfers as many as possible, leaving some cards with near 100%, but still an overall utilisaion of 60%. She doesn't close the old accounts either.
I would have thought that the most "responsible" one would be person A, because they're clearly living in debt, so cutting off access to the old cards following a BT seems sensible, right?
However, in terms of how lenders see these people, as far as I understand it, in a couple of months, lenders might look on person B more favourably than the others - and they might find it easier to take out another BT card to transfer the rest to 0%.
Person C is financially in the same situation as person B - how would lenders see that person? The amounts owed are the same, only some of the cards are at a high utilisation. But overall it's the same amounts, same debt and same overall credit limit.
Any thoughts? Am I right that while person A is being more responsible, person B looks more attractive to lenders? How does Person C look?
I know most advice is that you shouldn't have a total credit limit above your annual salary, and that credit utilization shouldn't be more than 30%. But trying to understand how this works, what about this scenario (totally fictitious numbers for ease of explanation!):
Three people have a debt of £6000 on various credit cards, all near the limit. They all take out a BT card, are offered a 0% £4000 limit and transfer £4000 to the new card from older cards. This gives a new overall credit limit of £10,000. They all earn the same, and have the same rent, mortgage, utility bills etc.
Person A then closes the old accounts which pushes the utilisation back up to near 100% - but still, financially they're in a better situation, more of what's being paid each month clears the interest bearing debt.
Person B is in the same situation, but doesn't close the old accounts. They are financially in the same situation, only now they have an overall utilisation of 60%.
Person C has lots of cards with smaller limits and transfers as many as possible, leaving some cards with near 100%, but still an overall utilisaion of 60%. She doesn't close the old accounts either.
I would have thought that the most "responsible" one would be person A, because they're clearly living in debt, so cutting off access to the old cards following a BT seems sensible, right?
However, in terms of how lenders see these people, as far as I understand it, in a couple of months, lenders might look on person B more favourably than the others - and they might find it easier to take out another BT card to transfer the rest to 0%.
Person C is financially in the same situation as person B - how would lenders see that person? The amounts owed are the same, only some of the cards are at a high utilisation. But overall it's the same amounts, same debt and same overall credit limit.
Any thoughts? Am I right that while person A is being more responsible, person B looks more attractive to lenders? How does Person C look?
0
Comments
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The only disadvantage person C will have, is having low limits on all their cards, showing that their lenders tend to share the view that they're higher risk.
But of course, it varies across lenders.
Person A would want to stop going out of their way to appear high risk, unless they genuinely can't control their spending.0
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