Personal Finance

RBC student line of credit ruins your credit score

  • Last Updated:
  • Feb 16th, 2019 7:10 am
Member
Jun 13, 2018
355 posts
230 upvotes
Maybe student loans should go back to the way they used to be, lump sum term loans dispensed on a set schedule with no flexibility other than interest rate when it has to be repaid... Even though all lenders know how to underwrite how a SLOC works if someone needs a mortgage someday.
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Oct 4, 2009
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gemenichic wrote:
Feb 8th, 2019 10:57 am
Superfresh89

It’s not a question of ruining a score.

When it’s reported as a line, the payment on a $50k balance is calculated by other lenders as 3% or $1500. The actual loan payment may only be $400.

Therefore, looking for a mortgage, you get $1100 of your income wrongly attributed as already used by another lender. So your total income available for the mortgage is reduced by $1100 reducing your potential purchase by a couple hundred thousand.

That’s a BIG deal.
What’s a bigger deal is people with large student loans who somehow think it’s a good idea to immediately buy a house and get a mortgage before paying off said loan AND saving up for a solid(i.e. 20+ %) downpayment.

Attack the loan mercilessly for a few years and wipe it out. Whatever it takes, extra shifts, OT, 2nd job. It needs to go. Then do the same when saving for a substantial downpayment. Once that’s done, it’s time to consider buying.

Everyone wants things so easy today, just pile on more debt. It’s gross.
Jr. Member
Jul 22, 2013
195 posts
53 upvotes
Actually I think the OP is correct. They will still report a LOC even after you convert it to loan, meaning set monthly repayment only no withdraw. My mortgage broker had to get all my statement and show to the lender to make a case. But RBC says that's the way it's reported and nothing they can do. I don't believe it had a huge impact on getting a mortgage though. You just can't keeping using it like a LOC (unsecured one too), which is probably the right thing to do anyway.
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Newbie
Jun 16, 2016
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@smiddy16 and @smanmit2 I've had same issue with RBC and after months of back and forth, all I was able to get was to get them to offer me a new term loan that will replace the LOC. I didn't want to go this route, and am also curious how you resolved this / got them to fix it.
Member
Sep 2, 2009
233 posts
110 upvotes
Ottawa
ritzcrv wrote:
Feb 11th, 2019 11:19 pm
Maybe student loans should go back to the way they used to be, lump sum term loans dispensed on a set schedule with no flexibility other than interest rate when it has to be repaid... Even though all lenders know how to underwrite how a SLOC works if someone needs a mortgage someday.
A SLOC is not a *government* student loan though. Yes, it is intended for school, but it has zero backing by the government or affiliation with government programs. Warning: I do not recommend this!! SLOC can be part of a bankcruptcy but Student Loans (gov.) can't for a period of time - this will actually screw up your credit score more than 100% utilization on one loan (plus may screw over any co-signor if there is one).
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Nov 22, 2015
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gemenichic wrote:
Feb 8th, 2019 10:57 am
Superfresh89

It’s not a question of ruining a score.

When it’s reported as a line, the payment on a $50k balance is calculated by other lenders as 3% or $1500. The actual loan payment may only be $400.

Therefore, looking for a mortgage, you get $1100 of your income wrongly attributed as already used by another lender. So your total income available for the mortgage is reduced by $1100 reducing your potential purchase by a couple hundred thousand.

That’s a BIG deal.
cyberbruce wrote:
Feb 8th, 2019 1:42 pm
This.

And while it’s not a big deal for me, anyone who doesn’t have any other revolving products may think it is. They’d be constantly at 100% utilization.
This is simply not true. I worked at a bank for several years and have done tons of loan/PLC applications.

We always used 3% of the PLC balance in our calculations. Doesn't matter what the limit is, UNLESS it's the actual PLC being applied for.

Applying for a PLC: 3% of the application limit added to DSR calculations.

Applying for something else, and you happen to also have a PLC: 3% of the balance.

Also, OP was specifically saying that his PLC is ruining his credit score, not that he can't apply for more credit.
Newbie
Mar 21, 2016
48 posts
32 upvotes
kimjoo10 wrote:
Feb 12th, 2019 10:46 am
@smiddy16 and @smanmit2 I've had same issue with RBC and after months of back and forth, all I was able to get was to get them to offer me a new term loan that will replace the LOC. I didn't want to go this route, and am also curious how you resolved this / got them to fix it.
I wasn't able to get it fixed. They said they would look into it for the future on how they report SLOCs for credit reports but they couldn't do anything for me. I ended up just paying it off with savings I had put aside because I'm sick of RBC and I wanted to close it. I've had a lot of issues with them while trying to get a SLOC for my MBA (telling me one interest rate on the phone then when I go in to sign papers it's higher...happened twice) so this was the cherry on top that finally made me leave them for another bank.
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Apr 5, 2016
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S5 wrote:
Feb 12th, 2019 7:06 am
What’s a bigger deal is people with large student loans who somehow think it’s a good idea to immediately buy a house and get a mortgage before paying off said loan AND saving up for a solid(i.e. 20+ %) downpayment.

Attack the loan mercilessly for a few years and wipe it out. Whatever it takes, extra shifts, OT, 2nd job. It needs to go. Then do the same when saving for a substantial downpayment. Once that’s done, it’s time to consider buying.

Everyone wants things so easy today, just pile on more debt. It’s gross.
Playing devil's advocate but unless you were extremely debt averse, why would you pay down a student loan when often time its interest is super low like Prime rate. Better to save that extra cash flow and grow it for that down payment in a balanced or growth fund. In 5 years, you'll most likely end up richer than paying off the loan aggressively then saving afterwards.
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bomber17 wrote:
Feb 15th, 2019 4:15 am
Playing devil's advocate but unless you were extremely debt averse, why would you pay down a student loan when often time its interest is super low like Prime rate. Better to save that extra cash flow and grow it for that down payment in a balanced or growth fund. In 5 years, you'll most likely end up richer than paying off the loan aggressively then saving afterwards.
House downpayment money doesn’t belong in growth or balanced funds. Leveraged equity investing of house downpayment funds is even dumber.
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S5 wrote:
Feb 15th, 2019 10:32 pm
House downpayment money doesn’t belong in growth or balanced funds. Leveraged equity investing of house downpayment funds is even dumber.
Worked pretty well for others. Myself included. Even less risky index funds have returns better than the rate of a student loan. People are taking longer to save up for a down payment due to prices so high. It'll take people 5-10 years to grow a $300k down payment. Good enough time to let the indexes give you a sizable return. Paying down cheap loans is a dumb idea you can easily get better returns elsewhere.
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bomber17 wrote:
Feb 16th, 2019 3:24 am
Worked pretty well for others. Myself included. Even less risky index funds have returns better than the rate of a student loan. People are taking longer to save up for a down payment due to prices so high. It'll take people 5-10 years to grow a $300k down payment. Good enough time to let the indexes give you a sizable return. Paying down cheap loans is a dumb idea you can easily get better returns elsewhere.
It might have worked during the great bull run of the last decade but to categorically state that it will work as if it is easy money is just plain silly. If faced with a significant drawdown shortly before a planned purchase the leveraged investor would be devastated when his/her downpayment funds go up in smoke.

As to “less risky index funds”, their fixed income components have current Yields To Maturity around 2%. Borrowing at 4+% to invest a significant portion in FI at 2% is a great way to guarantee a losing outcome. Only spectacular equity returns can mask the futility of such a strategy.

Congrats on getting lucky, suggesting others do the same is irresponsible.

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