Should I Cancel My Credit Card Before Applying for a Mortgage?

Getting a mortgage to buy your dream home can be an exciting yet stressful process. You want to present yourself as an ideal borrower to get the best interest rate possible. This leads many people to wonder – should I cancel my credit cards before applying for a mortgage?

The short answer is no, you generally shouldn’t close your credit cards before applying for a mortgage loan Here’s a detailed look at how closing credit cards can impact your mortgage eligibility and interest rate, plus tips for managing credit wisely when buying a home

How Closing a Credit Card Can Affect Your Mortgage

Closing an old credit card account may seem like a smart financial move when you’re trying to clean up your credit. But it can actually hurt you when applying for a mortgage. Here are some of the potential effects:

• It can lower your credit score. Closing a credit card reduces your total available credit, which increases your credit utilization ratio. This ratio makes up 30% of your FICO credit score. The higher your utilization, the more it drags down your score.

• It impacts the average age of your credit. The length of your credit history makes up 15% of your credit score. If you close one of your oldest cards, it brings down the average age of your accounts.

• You lose available credit. Having access to more available credit looks better to lenders. They want to see you have a reasonable debt load compared to your total credit limits.

• Your credit mix is affected Credit scoring models like to see you can handle different types of credit, from credit cards to installment loans If closing a card changes your overall credit mix, it can ding your score.

For all these reasons, closing an old credit card account can lower your credit score, which lenders rely heavily on to make mortgage decisions.

When Can It Make Sense to Close a Credit Card?

While you generally shouldn’t close credit cards before getting a mortgage, there are some cases where it may be reasonable:

• You have an old, unused card with high annual fees. Keeping it open may not be worth the cost if you don’t use it.

• The card has predatory terms, like outrageous fees or interest rates above 36%. There’s no reason to keep supporting a predatory lender.

• You have a large number of open cards. If you have over 10 open accounts, closing your newest card likely won’t impact your score much.

• The card is fairly new. A new credit card doesn’t help your credit history length as much as older cards.

Before closing any card, weigh the potential damage to your credit. If you do close an account, do so at least 6 months before applying for a mortgage to allow time for changes to your credit report.

6 Tips for Managing Credit When Buying a Home

Here are some smart ways to manage your credit accounts when applying for a mortgage, besides not closing them:

• Keep balances low. High balances drag down your credit scores. Try to keep card balances under 30% of the limit.

• Pay on time. Payment history is 35% of your FICO score. Set up autopay if needed to avoid late payments.

• Limit hard inquiries. Every mortgage or loan application causes a hard inquiry, which dings your score. Minimize new applications.

• Don’t open new accounts. Adding new credit cards or loans can make you look risky to lenders. Avoid new accounts.

• Leave savings alone. Don’t withdraw retirement funds or savings to pay down debts. Lenders want to see you have reserves.

• Correct credit report errors. Dispute and remove any inaccurate information on your credit reports.

Stick to these credit management tips when shopping for a mortgage. With some discipline, you can get approved for the best rates.

What to Do If You Already Closed a Credit Card

Uh oh. If you already closed some credit cards thinking it would help your mortgage eligibility, don’t panic. Here are some steps to take:

• Contact the card issuer to reopen the account if possible. Many will reopen a recently closed account if you ask.

• Explain the situation to your lender. Let them know if credit actions were taken without mortgage plans in mind. Underwriters may understand.

• Highlight other positive factors. Emphasize your long credit history, other open accounts, solid payment record and ample reserves.

• Make a sizable down payment. The higher your down payment, the less concerned lenders are with your credit. A 20% down payment gives you the best rates.

• Apply with alternative lenders. Online lenders and credit unions may weigh credit differently and be more flexible.

With a little work, you can offset the impact of closing a credit card account. Don’t get discouraged.

Key Takeaways on Closing Credit Cards Before a Mortgage

• Closing credit cards can lower your credit score by affecting your utilization, history length and credit mix.

• It’s generally recommended to keep credit cards open when applying for a mortgage.

• If you already closed an account, take steps to rebuild credit and highlight other strengths in your application.

• Maintaining good credit hygiene by keeping balances low and limiting new accounts is key when mortgage shopping.

While closing unused cards may seem financially wise, it can backfire when you need pristine credit to get a home loan. Resist the urge to close old accounts, and you’ll be in a better position to get approved for the mortgage you need.