Contemplating on closing your credit cards before applying for a mortgage? This can impact your credit score and, consequently, your mortgage application. The credit score plays a pivotal role in mortgage applications as it serves as a measure of an individual’s loan-worthiness. The Fair Isaac Corporation (FICO) credit ranges include:
- Exceptional: 800+;
- Very Good: 740 – 799;
- Good: 670 – 739;
- Fair: 580 – 669; and
- Poor: 579 and lower.
A higher credit score indicates a lower credit risk, increasing the likelihood of loan approval and potentially qualifying borrowers for better interest rates and terms. Therefore, maintaining a good credit score is crucial for securing favorable mortgage financing.
Before making any decisions, it’s important for you to understand the impact linked to closing a credit card account.
There are a couple of positive impacts when closing your credit card account:
- Debt-to-Income Ratio: Closing a credit card can potentially lower your overall debt, which may positively impact your debt-to-income ratio. Lenders often consider this ratio when evaluating your mortgage application.
- Reduced Credit Lines: Closing a credit card reduces your available credit, which may be viewed positively by lenders. It can indicate that you are not planning to accumulate more debt.
And here are its negative impacts:
- Credit Utilization Ratio: Closing a credit card reduces your total available credit, which may increase your credit utilization ratio if you carry balances on other cards. A higher credit utilization ratio can negatively impact your credit score.
- Credit History Length: Closing a credit card account shortens your average credit history length, which is a factor considered in your credit score. A longer credit history is generally seen as positive.
- Credit Mix: Lenders like to see a mix of different types of credit accounts. Closing a credit card may impact this mix.
There are other options for people with lower credit scores.
While a traditional fixed rate mortgage often requires a FICO score around 620 or more, the following are alternatives:
- VA loans: Many lenders want to see a 580 to 620 score;
- FHA loans: A 580 or higher score qualifies for 3.5% down payment while lower than 580 requires 10% down;
- USDA loans where most lenders ask for 580 to 640 scores.
More on that here.
Tips for Mortgage Application:
- Timing is everything: If you plan to apply for a mortgage soon, it’s generally advisable not to make significant changes to your credit profile, such as closing credit accounts.
- Consult with a Mortgage Professional: They can provide personalized advice based on your specific financial situation and goals.
- Review Your Credit Report: Obtain a copy of your credit report and review it for accuracy. Dispute any inaccuracies and ensure that your credit report reflects your true financial history.
Bottomline, responsible management of credit cards, including making timely payments and keeping balances low relative to credit limits, can positively influence credit scores. Conversely, late payments, high credit card balances, and closing accounts can negatively affect credit scores. The important thing is, as long as you maintain a healthy credit card account status, preserve and improve credit scores, it can help you get a high probability of getting approved for a home loan and get a good interest rate.
While closing a credit card account can have implications, the decision should be based on your overall financial goals and credit situation. Always seek advice from a financial or mortgage professional before making such decisions, especially if you’re in the process of applying for a mortgage.
