21 May Do I have too much credit?

 Q. I wanted to refinance my mortgage but the bank says they won’t do it unless I cancel some of my credit cards. Can you explain why and what I should do?

A. Balancing the right amount of debt is a challenge for anyone.

But credit cards fall into that “bad debt” category, and it can give lenders some negative perceptions.

Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, said it sounds like you have too many credit cards.

“Lenders generally want one thing — to get paid back,” he said. “The more access to credit that you have, and the more you use that credit, it worries a lender that they may not get paid.”

For example, Lynch said, let’s say you have credit cards with available credit of $50,000, and you’re using $40,000 of that credit. And now you’re looking to refinance. To a lender, it looks like you can’t pay your bills.

“In fact, anyone who carries credit card debt cannot pay their bills. That is why they have credit card debt,” Lynch said.

Lenders are more risk-averse than ever before in light of the 2008 real estate crisis, said Michael Pirrello, a certified financial planner with Mill ridge Wealth Management in Chester.

“Prior to the 2008 meltdown in financial markets and real estate values, lenders were too loose with their lending standards and as a result they have taken significant losses on bad loans,” he said. “Currently the lending pendulum has swung to the far opposite side and lenders are now more conservative, employing very tight lending standards.”

As this relates to your case, what your potential mortgage lender is more than likely seeing through your credit report is a significant level of credit available to you, Pirrello said.

The formula that compares your available credit to how much you’re actually borrowing is called your credit utilization ratio.

“Historically, this has been a good thing for borrowers as credit utilization ratios are a key determinant for lenders applying for loans as well as a key component of your credit score,” Pirrello said.

You can figure out your utilization rate by dividing your total credit card balances by your total credit card limits,” Pirrello said.

“Lenders don’t like high utilization rates because it tends to indicate there’s a higher chance of you not being able to repay your debts,” he said. “Keeping your credit card utilization low, preferably under 30 percent, is a good goal to aim for. Creditors want to see proof that you can manage credit wisely.”

Assuming that you have a lot of credit available to you and you have managed and used your credit prudently, then lenders will look favorably upon you as a borrower, he said. However, it seems as if your potential mortgage lender has an issue with the level of credit that you have available to you.

Pirrello said each lender has lending standards that are unique to them. In this case, they can request that you close down a portion of your available credit prior to your refinance, thereby limiting the amount of credit available to you and presumably increasing the odds of you remaining financially healthy and their loan being repaid.

“I would suggest you contact that lender and explain to them that you would prefer not to close existing credit cards because it could possibly have a negative impact on your credit score — closing cards means you have less credit available which could increase your credit utilization ratio,” he said. “See if they will waive that requirement.”

If not, Pirrello recommends you inquire with other mortgage lenders to see if you can get the same or better deal on a refinance without the requirement to close existing credit accounts.

“The choice will always be yours as to how you proceed, just understand the relationship between your credit utilization ratio and your credit score,” he said.

Learn more about how you can improve your credit score for a refinance.

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This story was first posted in May 2015.