Why You Should Not Close Old Credit Cards Before Getting a Mortgage

One day a new loan officer walked into the mortgage firm where I was working and announced that she had closed all the old accounts on her credit report, thinking that would improve her credit. She was surprised when it did just the opposite - and her score went down!

The advice I am about to give you is counterintuitive, but hear me out.

Most consumers have credit cards, lines of credit and other accounts listed on their credit report that they haven't used in years. Credit cards, for example are rarely listed as closed unless the consumer asks the issuer to close them.

Your first inclination when you review your credit report is probably to close those old accounts. In fact, "account was closed" is one of the top disputes reported by credit bureaus. But in fact, closing accounts may lower your credit scores. There are several reasons why:

While closed or open accounts both count in calculating your credit score, once an older account is closed it may drop off your credit report, and that may shorten the overall length of your credit history. When it comes to credit reports, an older credit history is better.

More importantly, maxing out revolving accounts can hurt your score. Anytime you use more than 50% of your available credit on a revolving account such as a credit card, your score can start taking a hit. (It's impossible to say exactly how much, though, since it depends on other factors in your credit history.) FICO scores, evaluate your "utilization" level both on individual accounts, as well as the total of all revolving accounts. Extra available credit can be helpful in keeping this utilization level down.

What about the notion that your score will suffer if you have too much revolving credit available? Fair Isaac says the amount of available credit is not a stand-alone factor in calculating credit scores, so it shouldn't be of concern to consumers. One of my colleagues, Scott Bilker, founder of DebtSmart.com has eighty open credit cards and an excellent credit score in the 800s!

FICO recommends leaving unused revolving accounts open. If you do want to close accounts, however, FICO recommends you close more recent retail cards and those with smaller credit limits. Don't close your oldest accounts.