Should I close card accounts to get a mortgage?

Lenders want to minimize risk, but closing accounts can hurt credit score

Question for the expert

Dear New Frugal You,
  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 yes, how much? Thanks. -- Prakash

Answer for the expert

Dear Prakash,
Congratulations! Not only on your prospective new home, but 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. Credit scores predict your creditworthiness, and FICO scores range 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 will 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 track the same financial activities. So their scores will vary, too.

Don't be distracted by the different scores. Your question is whether closing the accounts will significantly affect your score. And the answer is that's possible, but unlikely.

Here are the five factors FICO uses to create your score:

  • 35 percent payment history
  • 30 percent amounts owed
  • 15 percent length of credit history
  • 10 percent new credit
  • 10 percent types of credit used

By closing three accounts you're affecting the amounts owed and, potentially, the length of credit history.

"Amounts owed" not only looks at how much you owe various lenders, but what percent of your total available credit you currently owe -- your credit utilization.

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 reduce 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.

A smaller concern is that 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, eventually, reduce the length of your credit history. That, too, would hurt your score. I say "eventually" because even if you close the account today, the positive payments associated with the account stay on your credit for 10 years. So in 10 years, it will stop counting in your favor, a potentially negative event, but by then, hopefully, you'll have a decade's worth of other good payment behavior to replace it.  

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 percent 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 percent 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.

See related: How to choose a mortgage broker 

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Updated: 05-24-2018