Canceling Your Credit Card Could Hurt Your Chances of Getting a Home Loan
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Right now, many people seemed inclined to cancel credit cards and go with cash. There is a movement, in this time of recession, to get back to the sound basics of finances and get rid of debt. For many people, getting rid of credit cards is the way to do this. In addition to a desire to get rid of the credit card, many are considering buying a home. However, it is important to note that what you think might be a wide financial decisions — getting rid of your credit card — may actually turn out to be a stumbling block to getting your home mortgage loan approved.
How canceling your credit card may hurt your home mortgage loan application
When you apply for a home mortgage loan, the lender pulls up your credit report to determine whether or not you are an acceptable risk. If you credit score is not high enough, there is a chance that you will not be able to get a home mortgage loan. This is where canceling a credit card comes in. One of the biggest items that goes into your credit score is how much available credit you have. When you cancel your credit card, suddenly your available credit is dramatically decreased.
Another important part of your credit score is how much of your available credit you are using. You get best results when you are using between 30% and 50% of your available credit. More than 50% of your credit, and your credit score can seriously suffer. Consider the following scenario:
You have 3 credit cards. The first card has a limit of $2,000 and you have a balance of $800. The second card has a limit of $3,000, and you have a balance of $1,500. The third credit card has a $2,500 limit, and you are using $250 of it. Out of a total of $7,500 available credit, you are using $2,550, or 34%. Now, say you pay off and cancel you third credit card. Now, suddenly you only have $5,000 available, and you still have combined balances of $2,300. Now all of a sudden you are using 46% of your available credit. If you put anything else on your remaining credit cards, you tip the scales. And even at 46%, your credit score will be lower than at 34%.
You can see how if you are on the edge for approval of a home mortgage loan, canceling your credit card can cause problems. Instead, wait until after you close on your home to cancel your credit card.
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