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 $2,500 limit, giving you $10,000 available credit. If you have a total of $5,000 charged to those accounts, you are using 50% of your limit.

By canceling one of those cards, you now have $7,500 available credit. That $5,000 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, and possibly raising a red flag on your mortgage application. Canceling that credit card can cut your credit score, which could result in the lender demanding a higher interest percentage rate or offering you a smaller loan amount.

Real estate agents are not loan specialists, however they work closely with good local lenders. Ask your agent for a recommendation and get in touch with a lender before you start your home search. The lender will let you know how much you are qualified to borrow and what the monthly payments will be. You may be pleasantly surprised at how much home you can afford.

You can find out if your credit is in good standing annually at no charge by visiting www.annualcreditreport.com. Your report will list your personal information, any negative reports and the number of your accounts in good standing. Be sure to check it over carefully for errors and challenge those errors with the company. Keeping your credit in good standing will save you lots of money.