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In the eyes of an auto loan officer, which applicant is lower risk? What about a mortgage?

Two applicants have identical financial obligations, income, credit utilization and credit files; all that differs is their total available credit.

Applicant A has one card with a credit limit of $10000, and owes $100.
Applicant B has one card with a credit limit of $1000, and owes $10.

This question isn't about credit score, but about what lenders look at when deciding to approve or deny a new line of credit, such as a mortgage or car loan.

I did a little research, and it appears that there is a variety of conflicting advice on this topic. For example:
This article explains that it's a myth: Myth: Too much available credit hurts home loan
This StackExchange answer says otherwise, but relates specifically to applying for a new card, as opposed to an installment loan like a mortgage or auto loan.
This mortgage site advises that it's possible to have "too much credit", but it doesn't specifically say that it reflects negatively to lenders.

A bit of background: I'm in the process of "building my credit" and trying to decide if it's a good idea to get a credit line increase. I won't need to apply for new credit for at least 2 years, so I'm not at all worried about the hard inquiry. I will be buying a new car in about 3-4 years, and possibly a house in 10-15.

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You may be disappointed to hear the answer is "it depends".

The lender is trying to assess how risky of a borrower you are. That risk tolerance will vary by lender and by type of loan. How much weight they place on the credit score and available credit is really up to them. It is just another tool they may use.

You can see how a conservative lender may consider $10000 of credit available too high a risk. Often this will be assessed along with other non-credit factors like income and job history. $10k borrowing power with a $30k income vs a $150k income. Who would you rather give a mortgage too?

If you want to buy a car and purchase a home, are your debts paid off? Do you have cash saved for emergencies? Are you saving for a 20% down payment? These things will improve your financial position much more.

Focusing on your credit is like blogging about working out. It's not bad, but it's not how to lose weigh and get healthy.

  • I understand the income disparity, and saving for emergencies; those seem axiomatic. However, despite me making 4-6 times the rent, apartment complexes always want an exorbitant deposit, citing "no credit history" as the reason. BofA outright denied me for an auto loan due to "insufficient credit history", even though I had over 30% to put down. Up until a year ago, I didn't have any credit or debts of any kind as I've never needed to borrow. The only "debt" on my credit report now is a co-signed auto loan, which will be paid off before I actually need more credit. What am I doing wrong? – Eric Seastrand Jun 7 '16 at 15:28
  • @Eric it sounds like you are doing lots right (except for the cosigned loan - pay that off asap). The best thing you can do is continue to save and pay for things without credit, including cars (yes it can be done). Some lenders and landlords will do the 'knee-jerk' credit check and rejection. It is possible to find landlords that actually evaluate tenants beyond a credit score, and it is still common practice for a lender to manually underwrite a borrower. You can find a mortgage lender that will look beyond a short credit history. – jkuz Jun 10 '16 at 14:13
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Often a lender looks not at what you owe so much as how much debt you're capable of taking on as part of their decision. Someone who has a credit card with a $1,000 limit and a balance of $10 is using 1% of his available limit, as is the person with a $100 balance on a $10,000 credit card. This is well below the thresholds that are warning signs to creditors. After all, if you have a number of credit accounts and most of them are running balances of more than 30% of the limit then it might signal you're living off your cards to cover expenses your income can't and that's a dangerous sign to a lender. That being said, a creditor may be a bit less enthusiastic about a loan to someone with a substantially higher amount of available credit, even though their balances are low. Why? Well, what's true today might not be true tomorrow. The borrower may only have a $100 balance on that $10k card now, but that could change for any reason at any time and the borrow could run up $9,000 in new charges. In such a situation, their debt-to-income ratio (a prime factor in lending) could now be grossly disproportionate, making them a much higher risk. There are many factors that come into play, and every creditor has their own metrics to work from, but having availability of large credit lines, even though they may be unused, can be a negative weighting factor.

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