When preparing to apply for a mortgage, every financial decision matters. One question many people ask is whether closing a credit card account will help or hurt their chances. Spoiler alert: it’s usually not a good idea.
Your credit score plays a huge role in determining your loan eligibility, so it’s worth understanding how closing an account can influence it.
The Basics of Credit Scores
Lenders look at your credit score to measure your reliability as a borrower. The FICO score ranges are:
- Exceptional: 800+
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 579 and below
Higher scores often mean better loan terms and lower interest rates, making it essential to keep your score in great shape.
The Impact of Closing a Credit Card While Applying for a Mortgage
Lowers Your Credit Score
Closing a credit card reduces your available credit, which can increase your credit utilization ratio—the percentage of your credit limit that you’re using. Lenders prefer this ratio to stay below 30%. Closing an account could push it higher, hurting your score.
Say you have two credit cards—one with a $5,000 limit and one with a $10,000 limit. You owe $3,000 total, so your credit utilization is 20% ($3,000 out of $15,000). Now, if you close the $10,000 card, your available credit drops to $5,000, and suddenly, your utilization jumps to 60%. Lenders see that as a red flag, even though you didn’t increase your debt.
Plus, if the card you close is one you’ve had for years, it could shorten your average credit history. Since lenders like to see a long and stable credit history, closing it might make you look like a slightly riskier borrower.
Shortens Your Credit History
The length of your credit history plays a role in your credit score. If the account you’re closing is one of your oldest, you could lose points, as a shorter credit history is less appealing to lenders.
For example, you’ve had one credit card for 10 years and another for 2 years. Your average credit age is 6 years. If you close the 10-year-old card, your average drops to just 2 years. Even though the account still shows up on your credit report for a while, it won’t be counted in the same way, and lenders might see your credit history as less established.
Since mortgage lenders like to see a long, consistent credit history, keeping older accounts open can work in your favor.
Limits Your Credit Mix
Lenders like to see a variety of credit types (e.g., credit cards, loans) because it shows you can manage different forms of debt. Closing an account reduces the diversity of your credit profile, which could affect your score.
What Should You Do Instead?
- Avoid making big changes to your credit profile before applying for a mortgage.
- Avoid opening or closing accounts until after your mortgage is finalized.
- Keep your credit card accounts open and maintain a low balance.
- Focus on paying down existing debt to improve your credit utilization.
- Regularly review your credit report to ensure it’s accurate.
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.
By keeping your credit profile stable, you’ll be in the best position to get approved for your dream home with the best terms possible!
Wondering what to do after applying for a mortgage? Check this out.