By Kathy Henne
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 charges to those accounts, you are using 50% of your limit.
By canceling one of those cards, you now have $30,000 available credit. That same $20,000 in charges now equates to over 66% of your total credit, which represents and adverse effect on the debt-to-credit ratio. You have essentially reduced your credit without reducing your debt and 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 rate or offering a smaller loan amount.
Real estate agents are not necessarily loan specialists, but most agents work very closely with their clients to help them find the best lender. Ask the agent you are working with for a recommendation, and get in touch with a lender well in advance of visiting your first potential home.
Contact the Kathy Henne Team RE/MAX by calling 937-778-3961.