To many potential home buyers thinking about mortgage pre-approval, it seems logical to pay off and cancel their credit cards to “make room” for a new mortgage. While paying off cards is a good idea, canceling them is not.
Many people don’t know that when you close down a credit line, you are actually erasing part of your credit history and potentially lowering your credit scores. The FICO scoring system focuses on your current credit more than anything else, and FICO is looking for active accounts with an excellent payment histories. Don’t cancel those cards – if you are no longer using a particular credit card, I suggest that you cut up the card, but don’t cancel it.
This advice is even more crucial if you will be applying for a jumbo loan (in the Bay Area, that’s a loan over $625,500). Jumbo lenders require that you have at least three credit lines open and active, so it’s really important to keep those cards open and to use each one at least occasionally, say every six months or so.
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