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There was a time that you could qualify for a mortgage with just a decent credit score and a self-reported, unverified source of  income. Since the housing crisis, banks are now double-checking everything and only giving the best rates to those with the highest credit scores. So now more than ever, credit card users need to pay extra attention to how they manage their credit before applying for a mortgage. The desire to achieve the highest possible credit score has even led some credit card users to cancel their cards, but is this a good idea?

Close Accounts or Keep Them Open?

So many people get into trouble with credit card debt that it may seem like closing credit card accounts would only improve one’s credit score. However, closing an account will likely hurt your credit, and here’s why. The credit scores that are used by lenders to determine creditworthiness are designed to give higher scores to those who manage their credit responsibly, which includes using a small portion of the total revolving credit extended. Closing an account reduces your total available credit, which, if you are already carrying credit card debt, will increase your debt utilization ratio (that is, the percentage of available credit that you’re using).

Debt accounts for about 30% of your credit score. By keeping your use of available credit low (ideally keeping it lower than 20-25%), you will be considered a better credit risk. By closing existing accounts, you are reducing your available credit, and raising your debt utilization ratio, which can lower your score.

Building Your Credit Before Applying for a Home Loan

For those who find their credit cards too tempting and can’t control their spending, there are some alternatives to closing an account that won’t hurt your credit. Whether you simply cut your cards in half, or freeze them in a block of ice, the key is to keep your account open and in good standing while avoiding spending.

Cardholders also need to be aware that each month’s statement balance will likely appear as outstanding debt on their credit report, even if they pay their entire statement balance in full by the due date. For this reason it may make sense to minimize or eliminate these balances before their monthly statement is issued (which is typically when lenders report to the credit reporting agencies). Since by law, payment due dates are on the same day each month, and there is usually a 21-25 day period between the statement closing date and the due date, the closing date will typically vary by a few days each month.

They must also keep in mind that if they carry credit card debt, in addition to potentially lowering their credit scores, the lender will also include the minimum monthly payment when calculating debt-to-income ratios. Cardholders may choose to avoid using their credit cards heavily for a few months leading up to a mortgage application.

Finally, credit card users should always avoid applying for new credit cards in the months leading up to their mortgage application. Inquiries for new credit can slightly lower their credit score, but mortgage lenders may also look at new credit as a potential red flag.

Taking out a mortgage is an extremely important financial decision, and borrowers should do whatever it takes to ensure that their application is submitted with the highest possible credit score. As you prepare to apply for a mortgage, it’s a good idea to check your credit reports — which you can do for free every year.  You can also check your credit scores to get an idea of your credit standing in general. There are free tools that allow you to do that — like Credit.com’s Credit Report Card, which updates two of your credit scores and an overview of your credit every month.

By ignoring your instinct to close credit card accounts, and relying on the facts about credit scores, you improve your chances of getting approved with better terms. Over time, this could save you a lot of money.

More on Credit Reports and Credit Scores:

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