A Good Time to Close Accounts?
When you get ready to make a home purchase, you will be busy sprucing up your credit to make your loan more attractive. You may run across something that says you should close your old, unused credit card accounts. The theory is that having too much available credit card capacity will hurt your credit scores. As a result, some people recommend closing those accounts before you apply for a mortgage.
How much of my available debt should I use?
In general, you should try to use 35 percent or less of your total available credit. This sends a signal to lenders that you are comfortably meeting all of your monthly obligations. The percentage of debt you're using is part of the “amounts owed” category in your FICO score.
In fact, you will do more harm than good if you follow this strategy. By closing your inactive accounts, you reduce the total amount of credit available to you. This has the effect of making it look like you're using a greater percentage of all the credit available to you. The credit-scoring models interpret this as a sign of trouble — if you're getting maxed out on your credit, you might soon default on the debt or make late payments. Therefore, closing those old accounts hurts your credit when you're trying to improve it. Some mortgage brokers and real-estate agents suggest this strategy with the best of intentions. Unfortunately, they end up leading you down the wrong path.
