Credit Score question

[Jinx]

We have some pretty smart guys on this board so I thought I would ask...

So lets say I have 800+ credit score, no CC or other debt other than the mortgage, and I am looking to build a shop/toy box at the house.

In talking to the credit union, I can increase my home equity line of credit (that currently is at $0 balance) pretty easy, no fees, decent rates, etc.

They asked where do I want to set the limit at and I asked how much can I get. They came back with $150k+.

I can see some advantages of going into a post corona/covid situation where there is likely to be some good opportunities for those with access to cash, but on the other side, I am likely to never use that much money for anything...

So here is the question for those who have better understanding of credit scores, "what will that much unused credit hanging out there do to my credit score?"

It seems like the credit agencies treat, or used to treat, availability to credit the same as debt so in my mind it is likely to mess up my ratios and cause the score to go down...

Does that sound right?

Any help/constructive input is appreciated.

 

[Kevin B.]

If it's a loan, it'll count against your credit:income ratio and lower your score however much. If it's a line of credit, only the amount you're using is counted.

 

[Tonkaman]

If it’s a credit line then you want the limit as high as possible. Credit agencies like seeing that you have lots of available credit, but the willpower not to use more than 30% of it. To them it doesn’t matter the dollar amount used as much as the percentage of available credit utilized.

I have actually seen my credit score jump by having credit limits raised! Seems crazy to offer me money and reward me for not touching it.

 

[Pike2350]

It just shows that you are fiscally responsible. Having the credit available is a good thing....however what really matters is how much or your credit you utilize at any given time.

You will likely take a tiny hit when they open/readjust your limit due to a credit inquiry but that will be short lived.

Honestly with rates where they are it may be more worth while to do a cash out refi vs a HELOC. HELOC's have higher interest rates. If you have a good score and good equity it may be the time to refi and take out the cash for the shop/toybox + some. That's what I did on a rental if mine. I took as much cash out as I could while still keeping the LTV to below 70%. I have cash reserves right now that I want to build my garage with....but with the virus I'm on hold until my work comes back around to full time with the pay cut reinstated. I have cash on hand now to make sure I dont suffer....but hope I dont have to tap into it thru all of this so I can build the garage....but we'll see.

If you went this route don't extend the terms if you can help it......but with rates around 3% it seems cheaper to go this route.....assuming your rate and term are higher.

My credit score was over 800 when I applied for the refi...I expected a hit if about 20-30 points after getting it...knocking me to the 700's...but it actually went up. I dont know why...maybe the payoff of the previous mortgage..but I actually increased it by 15 -25 points. As per America First's quarterly pull from Trans Union...it was 830. Credit Karma has it at 824 for both equifax Transunion.

 

[Jinx]

It just shows that you are fiscally responsible. Having the credit available is a good thing....however what really matters is how much or your credit you utilize at any given time.

You will likely take a tiny hit when they open/readjust your limit due to a credit inquiry but that will be short lived.

Honestly with rates where they are it may be more worth while to do a cash out refi vs a HELOC. HELOC's have higher interest rates. If you have a good score and good equity it may be the time to refi and take out the cash for the shop/toybox + some. That's what I did on a rental if mine. I took as much cash out as I could while still keeping the LTV to below 70%. I have cash reserves right now that I want to build my garage with....but with the virus I'm on hold until my work comes back around to full time with the pay cut reinstated. I have cash on hand now to make sure I dont suffer....but hope I dont have to tap into it thru all of this so I can build the garage....but we'll see.

If you went this route don't extend the terms if you can help it......but with rates around 3% it seems cheaper to go this route.....assuming your rate and term are higher.

My credit score was over 800 when I applied for the refi...I expected a hit if about 20-30 points after getting it...knocking me to the 700's...but it actually went up. I dont know why...maybe the payoff of the previous mortgage..but I actually increased it by 15 -25 points. As per America First's quarterly pull from Trans Union...it was 830. Credit Karma has it at 824 for both equifax Transunion.

All good input thanks guys.

I looked at a refi plus cash out, but the rates were pretty similar to HELOC. Plus there is going to be $5k+ in closing cost on the refi... So I was thinking I could pay a little extra interest for 10% the $5k would be of the $50k shop.

Also who knows, what extra might end up in the shop as we go. I would hate to run out of money...

 

[Kiel]

When I bought the sugar house home, I did a line of credit against my first home to finance the down payment and start the renovation. I asked for 100k and they approved in less than 10 minutes. Even when I had most of it utilized while we closed and were pretty spent on the line, my credit never took a hit. I like you never had other bill's also and plenty of collateral etc.

 

[Noahfecks]

So your credit score is only one part of the equation

Lenders look at more than the FICO.

 

[zmotorsports]

When we had our last home we had a line of credit for $21k. We originally took out the line of credit to purchase our first motorhome to get a lower interest rate as it was attached to our home. After paying off the motorhome a few years later I asked at the bank if we should keep the line of credit or not. We were told that even if there is no balance on the line of credit the reporting agencies treat it as though it is the full amount of the line of credit because in one motion you could utilize the entire amount and then potential debt turns into actual debt in an instant.

When we dropped the line of credit shortly after, our overall credit score went up within the next reporting cycle.

Personally I wouldn't utilize any more than you actually need, but that's just me.

Mike

 

[Kevin B.]

^ That's weird, because on my credit reports our line of credit from America First only showed up in the amount we had actually taken out. Kinda like a credit card will only show the amount you owe, as opposed to your credit limit.

Wonder if the bank has different ways of reporting the credit line.

 

[Bart]

I've been told in recent years to not cancel paid off cards and lines of credit, because the unused credit is a good thing.

 

[nnnnnate]

I feel like generally responsible people put too much thought into credit scores. I feel like its a tool and whether you go from 800 to 780 in the end it really doesn't matter.

It might be because I think my wife cares WAY too much about her number. For a long time it seemed like she was 5-10 points better that mine and she always made it a point to mention that. Well, when we went through our house build and construction loan, then loan, the refi all within 18 months we were seeing our numbers pretty regularly. We got separate letters in the mail after one of those and she opened hers to see that it was letting her know they pulled credit and that X was her score. I opened mine and asked what score she got out of curiosity. She had a HUGE grin on her face because she though she was going to be able to hassle me for having a higher number but it turned out I was like 20 points higher for some reason. She was not pleased and didn't believe me until she saw my letter. I'm chuckling about that quick turn now as I type this.

I know credit is important for being able to buy a house/car whatever. I know its important to get certain jobs. When you're in the 700+ range it doesn't matter as much as we may think it does. I'd personally do whatever is easiest in your situation and it seems like doing a home equity line is easy and cheap even if it means you're going to take a "hit" on your credit score. My question is where are you going to find someone to do the work right now (unless you're going to build it yourself...)

 

[Jinx]

Thanks for the input guys.

As far as finding builders, cash is king. There will likely be more guys looking to make rent/mortgage payments than normal if things are really slowing down.

I won't be in a big hurry, hoping to have the exterior done by next winter. The main point of loan would be for foundation/flatwork and exterior. The interior/lift/etc. will likely come as extra money does.

My hope is to settle on a design/blue print that can be built in stages, i.e running water and gas lines now so it is easy to finish off later on when additional funds are available. I am with Mike, I not a big fan of debt, but with certain things it comes in handy.

 

[zmotorsports]

I feel like generally responsible people put too much thought into credit scores. I feel like its a tool and whether you go from 800 to 780 in the end it really doesn't matter.

I think you may be right Nate. We've always had great credit at being in the low 800's. What was bothering me was we've NEVER been late on a bill and we don't have a lot of debt. We haven't had an auto loan since 1998 when we bought my wife's 1996 ZJ. I swore we would never borrow for another car and we haven't since. We paid our first home off in 2006 (purchased new in 1991) and then in 2007 we borrowed to purchase our current coach. We paid that 20-year note off in 8 years and still only had a credit score of around 812.

When we purchased our new home in late 2016 our FICO score was only at 821 and I was pissed because it should have been higher. My goal was to have a perfect credit score of 850 but I couldn't figure out what else I needed to do to obtain that. Upon talking to the credit union I kept getting the same answer, "that's a great score and you're not going to get any better than that." My response was "why have a possible 850 if it's unachievable?" Well it took a few years but last year we finally accomplished it.

And you know what? I don't feel any different now than I did prior. I don't know why I stressed and put so much emphasis on having a perfect credit score other than for my own knowledge of doing so because it really makes no different because I'll never borrow again for anything anyways.

To be honest it was stupid of me to stress so much over it.

Mike

 

[pELYgroso]

If you're over 750, it doesn't really matter. Most creditors look at the number and don't give any extra high-fives for any number over 750. I move my money around to make different deals work, and as long as I'm over that 750 number, I'm golden. The concern then becomes where my money is. For example, I want to start paying down my house faster, BUT, I also like to have liquid capitol in case a business opportunity comes around that requires cash. Since a house mortgage is super cheap money, I didn't want to pay it down, losing the liquidity of that cash I was putting into it. So I got a HELOC. My score was like 780, so I got the best rate they could offer, but I had a business card that I run all of my business expenses through for the travel points and pay off each month, and a loan on my work truck. They said I'd have to get rid of those to get the max amount of the loan. So, I paid off my truck with my business line of credit and paid off the card. Got the HELOC for the best rate and the highest amount possible, and then got a new loan for my truck and also another truck I bought for my estimator. I don't plan on using the HELOC for anything specific at this point, but it's nice having it there so I can put extra cash onto my mortgage and know I still have liquid capitol. My credit score went down to around 720 I think from the few credit pulls, but I don't plan on "needing" my credit score for at least a few months since I'm now in the position I want to be with LOC's and loans. I'm fine if it takes 6 months or so to get above the 750 number again. Don't stress too much about the exact number. If you're anywhere around 800, you're good.

Liquid capitol is a good thing. Cash in your account is best, LOC's are next, and CC limits IMO are for EMERGENCY use, or use it and pay it off monthly to get points or % cash back.

 

[Jinx]

Thanks Tyler, I appreciate the input!

 

[TurboMinivan]

I feel like generally responsible people put too much thought into credit scores. I feel like its a tool and whether you go from 800 to 780 in the end it really doesn't matter.

Here is what 22 years in car sales has taught me about credit and FICO scores.

A lender will look at many things to decide if they will give you a loan--your debt to income ratio, percent of credit available, and more. Once they decide they will offer you a loan, the rate you are given is then determined almost exclusively by your FICO score. If two applicants have the same debt load, the same income, the same available credit, etc then they will both be approved for a loan; however, the guy with a 675 FICO will be given a higher interest rate than the guy with the 750 FICO.

Also, different lenders have different FICO requirements for their tiers of approval. For example, Subaru Motors Finance only requires a FICO of 700 for their top tier (ie, lowest interest rate). On the other hand, America First Credit Union requires a FICO of 780 to receive their top tier approval. If your FICO is 710, you'll get SMF's very best rate whereas AFCU will knock you down to tier 3.

There are many factors to consider.

 

[zmotorsports]

While we talking about credit/FICO scores, back in 2007 my wife and I found out that not all loans/lending depends on your merely your score.

We had zero debt at this point because we had just paid our home off the year before and had paid off our coach just six months or so prior to the purchase of our new to us coach. We had been looking to upgrade our coach for nearly 9 months and we found "the one". I thought no big deal because we had such good credit score at well over 800 at this point. We were going to use our previous coach as trade-in on our new (used) to us coach. We had some liquid funds but didn't want to use them as that was our emergency fund so the approx. $50k value of our previous coach was going to be our deposit on the new to us coach. We thought everything was solid and were ready to sign and had all of the paperwork completed at the dealership when all of a sudden the bank put the skids on and said we didn't have enough debt to establish a true pattern of payment in which to loan on a $200k RV.

WTF does that mean???? Not "enough" debt to borrow on an RV.

We had to go through and do a full-blown net worth statement to prove that we had good spending habits and weren't just pissing our money away. I had never heard of that before. Hell, we borrowed on our first home in 1991 without question and we were barely in our 20's. We had never taken any of our loans to full term as all were paid in full early. We had busted our asses to save and maintain a very low debt to income ratio and practiced debt avoidance by being frugal. Now that we had a paid for home as well as many other assets and we were a "risky investment" in the eyes of the lender. I was actually insulted and nearly walked away from the deal but after I thought about it I realized that from a lenders point of view I was a nobody as I had such little debt to show a track record. After completing and submitting the net worth statement to the lender it was a done deal and no issues but that was definitely a different experience and I had never been told I didn't have enough debt before.

Just thought that was interesting and not sure if anyone had ever run across that before, because I sure as hell hadn't.

Mike

 

[Tonkaman]

About 10 years ago I had to file a bankruptcy. The same year my sister had to file one as well. After it was discharged I immediately went to work trying to acquire debt, I knew it would be hard to get loans and even harder to raise my credit score. my first loan was secured, $500 limit, and 30% interest. It only took a couple of years before I could buy anything I wanted again.

My sister on the other hand wanted to live debt free. She made $100k a year, had zero debt, paid cash for everything! 5 years later she tries to open a checking Account and they deny her because she had nothing on her credit report since the bankruptcy. She was forced to take out the same high interest loans I did. Unfortunately she was 5 years behind the rebuilding process compared to me.

Since then I’ve learned that debt is a part of the credit score cycle. Lenders love seeing people that can make payments even if it’s a high amount. They don’t trust someone off of the credit grid.

 

[Noahfecks]

I wish I had time to contribute, based on a quick scan of the info here my best advise is not to take financial advise on a 4x4 forum

 

[jeeper]

We had to go through and do a full-blown net worth statement to prove that we had good spending habits and weren't just pissing our money away. I had never heard of that before.

Since then I’ve learned that debt is a part of the credit score cycle. They don’t trust someone off of the credit grid.

This and this. Amen.

When I bought my super duty a few years ago I wanted to get a loan. I thought I could walk in, ask for money, and be on my way. My FIL gets a new car loan every year or so, and gets half of them repo'd. If he can get a loan, surely I could.
My credit score is 730something. I have had enough cash sitting in an account at that bank for many years. I have a long history with them.
Because I am self employed, and have rental income, they wanted me to account for every penny I had spent for the last 3 years, wanted new contracts signed with tenants, wanted profit and loss statements for years, etc. It was such a joke. I just asked for a money order instead and bought the dumb truck. It was actually a kick in the nuts to me that my worthless-turd FIL can get financing and I couldn't.

To make it worse, cash used to talk when buying stuff. Cash buyer got a better deal. Not anymore. I was looking at another truck recently, and they were willing to give me a better purchase price if I financed it because they get kick backs from the lenders.