Home Buddies – Home Ownership Coach – Houston, Texas

High Ratio on New Revolving Accounts

Many times people unknowingly make the mistake of borrowing against an entire revolving line of credit. Has anyone ever transferred a balance to a lower interest rate credit card? How about a home equity line of credit? When we borrow the entire limit against a new line of credit we lower our credit scores. If we borrow against multiple new lines of credit we can drop our scores more than a 100 points!

One of the biggest impacts on our scores is opening new accounts. The biggest negative affect we can have on our scores is opening multiple accounts with high debt ratios. You could have two accounts with high debt ratios, one of them could be a new account and the other could be an account that is ten years old. The newer account would drop your credit score more, simply because it is a “new” account with a high debt ratio.

One of the biggest problems is that we usually open a new revolving account only when we need it. For example: we go to purchase furniture and we want to finance the purchase. Typically the creditor will approve us for the full amount of the purchase. The problem is now we have just created a new account with a terrible debt ratio of 100%! Another common mistake is to find a low interest credit card and transfer all your balances to this credit card. Once again, creating the same problem; a new account with a high balance.

The solution to this problem is simple. We must plan ahead. We should always carry more credit than we will ever need. That way once we need to make one of those new purchases we will already have the credit available to purchase the item(s).

Another way to plan would be to use a second mortgage when purchasing a home instead of using a line of credit. Instead of using a credit line, we can use a second mortgage installment loan which has less impact on our scores.

Opening revolving lines of credit and borrowing the entire or most of the amount, is a common mistake done by consumers. The best thing to do if you are going to open a new revolving account is to have little or no balance until the account has matured for one year. If we have to borrow against a new account we must make sure the debt ratio stays below 50%.

Cliff Pape
Home Buddies