Buying · Credit · Financing · Real Estate

Keep Your Good Credit

You might assume that the fewer credit cards you have, the higher your credit score could be. Because of that assumption, some buyers preparing to apply for a home loan mistakenly cancel one or more credit cards. Why would this be a bad idea?

It has to do with the ratio of your debt to your available credit. Here’s a simple example: Let’s say that you have four credit cards, each with a $10,000 limit, giving you $40,000 available credit. If you have a total of $20,000 charged to those accounts, you are using 50% of your limit.

By canceling one of those cards, you now have $30,000 available credit. That $20,000 in charges now equates to over 66% of your total credit, which represents an adverse effect on the debt-to-credit ratio. You have essentially reduced your credit without reducing your debt, possibly raising a red flag on your mortgage application.

By canceling the credit account, you reduce your “wiggle room” and cut your credit score, which could result in the lender demanding a higher interest percentage or offering a smaller loan amount.

Real estate agents are not all necessarily loan specialists, but most do work very closely with such individuals. Ask the agent you work with for a recommendation, and get in touch with a lender well in advance of your first showing.

Marcia Kies Article – Keep Your Good Credit

Note:This article was originally published on this site on June 2nd, 2016. It has been updated reflect the current home market.

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