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