Applying for a new credit card can complicate your homebuying experience. To keep credit problems to a minimum while you’re getting a mortgage, it’s best not to make any big changes to your credit, like getting new credit cards.
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 shouldn’t close your credit cards before applying for a mortgage loan. Here’s more information on how closing your credit cards can affect your mortgage eligibility and interest rate, along with some smart credit tips for home buyers.
How Closing a Credit Card Can Affect Your Mortgage
If you want to improve your credit, closing an old credit card account might seem like a good idea. But it can hurt your chances of getting a mortgage. Here are some of the potential effects:
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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.
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It impacts the average age of your credit. Your credit score is based on how long you’ve had credit. Your average account age will go down if you close one of your oldest cards.
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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.
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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.
Because of these things, closing an old credit card account can hurt your credit score, which is a big deal for mortgage lenders.
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:
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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.
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The card has predatory terms, like outrageous fees or interest rates above 36%. There’s no reason to keep supporting a predatory lender.
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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.
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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:
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Keep balances low. High balances drag down your credit scores. Try to keep card balances under 30% of the limit.
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Pay on time. Payment history is 35% of your FICO score. Set up autopay if needed to avoid late payments.
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Limit hard inquiries. Every mortgage or loan application causes a hard inquiry, which dings your score. Minimize new applications.
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Don’t open new accounts. Adding new credit cards or loans can make you look risky to lenders. Avoid new accounts.
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Leave savings alone. Don’t withdraw retirement funds or savings to pay down debts. Lenders want to see you have reserves.
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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:
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Contact the card issuer to reopen the account if possible. Many will reopen a recently closed account if you ask.
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Explain the situation to your lender. Let them know if credit actions were taken without mortgage plans in mind. Underwriters may understand.
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Highlight other positive factors. Emphasize your long credit history, other open accounts, solid payment record and ample reserves.
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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.
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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
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Closing credit cards can lower your credit score by affecting your utilization, history length and credit mix.
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It’s generally recommended to keep credit cards open when applying for a mortgage.
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If you already closed an account, take steps to rebuild credit and highlight other strengths in your application.
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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.
6 steps to get your credit ready for a mortgage
Mortgage lenders look at your credit score and the interest rate you will pay as two of the most important things they do when deciding whether to give you a loan. To boost your approval odds, follow these steps to enhance your credit profile.
Pay attention to your spending
It’s best to avoid making large purchases on credit during the mortgage process. A lender may not care if you use your credit card for smaller transactions, especially if you pay off the card balance quickly. However, larger purchases may give them pause.
Should I Close a Paid Credit Card Or Leave It Open?
FAQ
Should you pay off a new credit card before a mortgage application?
In light of its extremely short track record and accompanying hard inquiry from the recent credit evaluation, a new account appearing on your credit report just prior to a mortgage application is likely to do more damage to your score than good. By all means, you should pay off that credit card, or at least pay it down.
Is it worth cancelling a credit card before applying for a home loan?
Ultimately, keeping or cancelling a credit card before applying for a mortgage will be an individual decision. And it’s a decision that may be influenced by how much someone is wanting to borrow, or how useful they find their credit card to be.
Can I pay down credit card debt before applying for a mortgage?
There are a few ways to pay down credit card debt before you apply for a home mortgage loan, but there could be an impact on your credit score in the short term. You can use a balance transfer credit card to pay down your card balances.
Should I apply for new credit cards after closing my home loan?
Don’t apply for any new credit cards until after you close on your home loan, even if you’ve already been pre-approved. Not only does every credit inquiry “ding” your credit for a while, but any new lines of credit can hurt rather than help.
Does closing a credit card affect a mortgage application?
Keeping open credit cards that you don’t use can help you keep your good credit score, especially if you want to apply for new credit soon, like a mortgage or an auto loan. Does closing a credit card affect mortgage application? The answer is yes.
When should I apply for a mortgage UK?
At a minimum, apply for a home mortgage at least three months after you apply for a new credit card. Ideally, wait six months. This waiting period gives your credit score time to rebound from the recent inquiry. Should I close credit cards before applying for a mortgage UK?.
Should I close my credit card before my mortgage?
You don’t necessarily need to close your credit cards before applying for a mortgage. Lenders will want to know that you can pay off your credit card debt and have a plan for how you will do it. However, closing your credit cards can hurt your credit score.
Should I cancel credit cards before buying a house?
It’s generally best to avoid making any major changes to your credit history before applying for a home loan, including closing a credit card. Closing a credit card can impact the average age of your credit accounts, especially if you’ve had the card for several years.
Should I pay off my credit card before applying for a mortgage?
You can get a mortgage with credit card debt, but your debt may contribute to reducing your overall creditworthiness. Paying off credit card debt before applying for a mortgage can improve your chances of getting approved and getting a lower interest rate.
Is it better to cancel a credit card or let it cancel itself?
Quick Answer. In general, keep unused credit cards open so you benefit from longer average credit history and lower credit utilization. Consider putting one small regular purchase on the card and paying it off automatically to keep the card active.