Today we are going to answer the ever demanding question of whether having more credit cards makes you more Credit Worthy.? Many people think that their credit worthiness is based on the amount of credit that they have available to them as well as the number of credit cards that they have.? Some people (and this is a true story) even think that the credit card companies who approve them for credit cards increases their credit worthiness.
This past week I had a client come into our bank branch who wanted to be approved for a mortgage. He didn?t bring any proof of income or any statements confirming his assets at other banks; he did however bring his American Express credit card.? The client continued to tell me that he was the proud owner of an American Express credit card and he reminded me that we do not offer American Express in our bank branch. ?I bet that you are wondering what was the colour of his American Express Card?well let me tell you that it wasn?t black.? This client was holding a green American Express credit card with a $5000 limit.
I tried to explain to this client that just because he currently has a lot of credit cards and just because he has credit cards from companies that are deemed to be prestigious it doesn?t automatically (or necessarily) mean that he will be approved for more credit.? This is especially true when clients are applying for a mortgage because it requires enough income to make the monthly payment on such a large amount of debt.
The truth is that people may not be approved for other credit products such as overdraft protection, a personal loan, a line of credit, or a mortgage if they already have a lot of credit.? If you already have a lot of credit products the odds of you being approved for more credit are very slim.? Of course this depends on several variables such as your personal income, personal stability, and total assets i.e. positive net worth.
Even if you have credit products that you are not currently using your bank will take them into consideration because technically you have the money available to be used at any time. The general rule of thumb is that banks will factor in a minimum payment of 3% of the total credit limit.? This is why we should always accept credit when it is offered to us i.e. pre approvals or mail offers because when we are in a financial bind and really need money the odds of us being approved for more credit are very low.
All I can say is that this man is lucky he has a very good financial advisor (me) to help him understand exactly how credit works.? I continued to explain to him that credit cards are not assets; believe it or not some people get the two very confused. Credit cards actually decrease our net worth, not increase it.
Take the test to find out if you are Credit Worthy
- Can you afford to pay off your credit card balances in full at the end of each month?
- Do you only make minimum payments onto your debts and carry credit card balances?
- Which percentage of your total income goes towards paying off debts?
- Is your net worth positive?
Photo by Philip Taylor
Source: http://www.dinksfinance.com/2012/07/are-you-credit-worthy/
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