Practical Credit Advice | Closing Credit Cards
Common Credit Advice: Never close a credit card.
If you’re a mortgage or real estate professional, you’ve probably heard (or given) this advice to your clients. I’ve given this advice multiple times to consumers working towards building healthy credit. However, if you’re working with a buyer struggling with credit card debt, it’s important to give better credit advice on this subject.
Closing credit cards while working towards healthy credit is a bad idea, and could potentially negatively impact your credit score. However, after the home purchase is complete (or 6+ months before a home purchase) closing a credit card may be the best thing for your client to avoid future credit challenges.
The key is to make sure you’re not jeopardizing a healthy mix of credit by closing a credit card. If you don’t have at least two revolving lines of credit, an installment loan, and preferably a mortgage, closing a credit card could dramatically drop your credit score. In this situation, you’ll want to look at replacing the high interest credit card with a lower cost option. The drop in credit score will be short lived if you’re diligent about keeping balances below 10% of the available credit limit.
If you have multiple revolving lines of credit, and a good mix of other loan types, closing a credit card will have a short term negative impact on your credit score. We only recommend closing credit cards that are high interest, high cost that keep consumers buried in debt with unnecessary fees and interest. If you keep your other credit card balances low after closing a credit card, it should help you mitigate the hit and maintain a healthy credit score.
Ultimately, closing a credit card makes sense if it is a threat your overall credit health. Avoid closing credit cards while trying to qualify for a home loan or any purchase on credit. In addition, be sure to replace any high interest, high cost credit cards with low cost options if it is impacting the overall mix of credit on your credit profile. With credit card debt officially exceeding pre-recession levels, topping $1.07 trillion dollars, helping consumers avoid future credit challenges is smart business.