Should I Avoid Closing Old Accounts Before Applying for a Mortgage in Minnesota?
A buyer called me from his home in Bloomington on a Thursday morning with a question that reflected a common and genuinely understandable misunderstanding about credit management. He had been building credit intentionally for about twenty months and had made real progress. He had started with a secured credit card from Discover that he had opened in his third month in the country, arriving from Mexico on an employment authorization through his employer in the manufacturing sector. He had added a credit builder loan eight months later. He had been added as an authorized user on his sister’s credit card account, which had been open for four years with perfect payment history. His score was seven hundred two. He was preparing to apply for a mortgage and had been doing research on credit best practices in the weeks leading up to his planned application date. In that research he had come across something that seemed to contradict the advice he had received when he first started building credit. He had read that credit utilization should be low before applying for a mortgage. He understood that. But the article he had read also suggested that having too many credit accounts could look negative, and he had a credit card he had received as an upgrade from his original secured card that he now had in a drawer because he did not use it very much. He was thinking about closing the account before applying. “I have a card I barely use,” he told me. “I thought maybe closing it would clean up my credit profile before the mortgage application. Is that the right move?” It was not the right move, and understanding specifically why required walking through the credit score mechanics that make closing old accounts counterproductive in the period before a mortgage application. Here is the complete explanation. The Instinct to Close Accounts and Why It Feels Right The instinct to close unused accounts before a mortgage application is intuitive and not completely without logic. The thinking typically goes something like this. A lender who looks at a borrower with multiple credit accounts might wonder about the potential for the borrower to run up debt on all of those accounts simultaneously. Closing accounts the borrower does not use demonstrates discipline and simplifies the credit picture. Fewer accounts means less complexity and a cleaner financial profile. This reasoning has some surface plausibility but is incorrect in how it models the way credit scores and mortgage underwriting actually work. Understanding why requires looking at what account closure actually does to the specific components of the credit score. How Account Closure Affects Credit Utilization The most immediately impactful effect of closing a credit card account before a mortgage application is typically the increase it produces in the credit utilization ratio. Credit utilization, as established in earlier articles in this series, is the ratio of total balances on revolving credit accounts to total available credit limits on those accounts. It accounts for thirty percent of the FICO score and is one of the most immediately impactful factors in the score calculation. When a credit card account is closed, the credit limit of that account is removed from the total available credit in the utilization calculation. If any balances remain on other open accounts, removing available credit from the calculation increases the utilization ratio even if the borrower has not spent a single additional dollar. Here is a concrete example that illustrates the problem. Suppose a buyer has three credit card accounts. Account one has a five-hundred-dollar limit and a fifty-dollar balance. Account two has a one-thousand-dollar limit and a zero balance. Account three, the one they are thinking of closing, has an eight-hundred-dollar limit and a zero balance. The total available credit across all three accounts is twenty-three hundred dollars. The total balance is fifty dollars. The utilization ratio is fifty divided by twenty-three hundred, approximately two point two percent. When the buyer closes account three, the eight-hundred-dollar limit disappears. The total available credit is now fifteen hundred dollars. The total balance is still fifty dollars. The utilization ratio is now fifty divided by fifteen hundred, approximately three point three percent. In this example the change is modest because the utilization was already very low. But consider a buyer whose balances are higher. A buyer with five hundred dollars in balances across accounts with a total limit of twenty-three hundred dollars has twenty-two percent utilization. Closing the eight-hundred-dollar limit account raises the total available credit to fifteen hundred dollars and the utilization to thirty-three percent. Thirty-three percent utilization is materially worse for the credit score than twenty-two percent, potentially affecting the score by twenty to thirty points or more depending on the starting score and other file characteristics. This utilization increase happens immediately when the account is closed and is reflected in the score calculation on the next reporting cycle, which is exactly the wrong time for a buyer who is about to apply for a mortgage. How Account Closure Affects Length of Credit History The second significant effect of closing an account before a mortgage application is the potential impact on the length of credit history component of the FICO score, which accounts for fifteen percent of the score. The length of credit history component is calculated based on three specific metrics. The age of the oldest account, the age of the newest account, and the average age of all accounts. Of these, the average age of all accounts is the most immediately affected by account closure. When an account is closed, it is removed from the calculation of the average age of accounts at the point when it drops off the credit report. Open accounts continue to age every month they remain open, contributing positively to the average age calculation over time. Closed accounts stop aging from the perspective of the average account age calculation and will eventually drop off the credit report entirely, at which point the positive age contribution