His mortgage company wants him to close accounts
Close Credit Card Accounts to Get a Mortgage?
by Gary Foreman
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How to Close a Credit Card Account
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I am buying a house worth $405,000. In order to qualify for mortgage of $309,000, my lender told me to close my three different credit cards with total credit of $20,000. They told me that once I close these accounts, they will approve my loan. Will closing these credit cards affect my credit score? And, if so, how much will it affect it?
Congratulations on your prospective new home and on the organized way that you've gone about preparing for it.
The simple answer to your question is, yes, it will affect your credit score, but no one can tell you exactly by how much. But, we can give you a general idea.
Let's begin with a bit of background on what's commonly called your credit score. Typically people are referring to your FICO score, which predicts your general creditworthiness. It ranges from 300 (very bad) to 850 (very good).
There are a number of variations on the score that are used by different types of lenders and businesses. Most often, they only vary a little, but occasionally, they have a bigger difference.
Add to that the fact that there are three credit reporting agencies calculating your score, and each of them might not be tracking the same financial activities. So their scores will vary, too.
But, don't be distracted by the different scores. Your question is whether closing the accounts will significantly affect your score. The answer is that it's possible, but unlikely.
Here's what FICO says makes up your score:
- 35% payment history
- 30% amounts owed
- 15% length of credit history
- 10% new credit
- 10% types of credit used
By closing three accounts, you're affecting the amounts owed and length of credit history categories.
The "amounts owed" not only looks at how much you owe various lenders, but what percent of your total available credit you currently owe.
Suppose you had two other credit cards. Combined with the three you may close, they offer you $30,000 in available credit. The mortgage company doesn't want to compete with big credit card bills each month. So if you reduce your available credit by $20,000, you minimize the risk to them.
But, if you owe money on your credit cards, you'll increase the percentage of credit available to you that you're using. That's a negative on your score.
It shouldn't have a big effect, especially if you're current on your bills and don't owe a lot on your credit cards. But if you owe a lot on your credit cards, it would have a bigger impact.
You'll also be affecting the "length of credit history." How long have you had the accounts you've been asked to close? If they've been open for many years, closing them could reduce the length of your credit history. That, too, would hurt your score.
Calculator: How much mortgage can I afford?
Looking beyond your question, it sounds like you're wondering if you should close the accounts and take the mortgage.
It's unusual for a mortgage company to ask you to close available credit and risk lowering (even a little) your credit score. It's more common for them to ask you to repay existing debt. You might want to ask them why they want the accounts closed.
Since you're bringing more than 20% down, I wonder if there's something behind their concern. It would be good to know before you commit to the purchase. It's possible that they believe that the home isn't worth your purchase price.
You'll also need to consider whether you'll be applying for other credit soon. If so, any lowering of your credit score could increase your borrowing costs.
Bottom line? Normally buying a home with a down payment of nearly 25% shouldn't be a problem if your income supports the mortgage payments. But the mortgage company's insistence on closing credit card accounts could be a warning sign that you should explore before going forward.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.
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