Banks only look at actual debt outstanding on a line of credit as opposed to total credit available.
Reality
Many lenders look at lines of credit as if they are fully utilized, whether or not the line is used at all.
Consider someone who has an unused home equity line of credit. A lender may evaluate them assuming the line is maxed out and factor the theoretical payment into their overall debt service. In other words, while someone may view unused lines of credit as additional liquidity, a lender could view them as a reduction in the ability to pay additional debt.
“Sometimes people think that adding lines of credit gives them flexibility. It makes them feel secure. But the very things that give you comfort can actually impair your ability to obtain other credit,” Foster says. “Banks don’t typically look at unused line of credit availability as a good reason to approve a loan. They don’t give you credit, literally, for that.”
Foster adds that maintaining unused lines of credit do have their purpose, in that they provide flexibility to quickly access cash when needed. It’s just important to be aware that they can make obtaining additional credit more difficult.
Myth
All sources of cash flow are weighed equally by lenders.
Reality
Income received from investments and business partnerships for example are often not considered the same as a salary to a bank.