Potential homebuyer worries closing credit card might impact credit score, ability to purchase property

Ilyce Glink and Samuel J. Tamkin, Tribune Content Agency on Aug 15, 2024

Q: I am looking to buy a home in the near future. I recently heard that my credit card with a big box discount store would come to an end. I signed up for a credit card with the big box store years ago to get a discount while buying gas and for purchases at the store. The store card will be replaced with a generic cash-back card that I can use anywhere. I have two other credit cards, but if I don’t get the benefits I used to get with the store card, I’m not sure I want to keep the card.

I really only want to have three cards and I know that closing a card can hurt my credit score. My credit score today is above 800. Should I cancel the card? How would that affect my credit score and my ability to purchase that home?

A: You have a great credit score, and we’d like to see you keep it that way. So, let’s start with a short explanation of how credit scores are built.

Basically, all credit scores measure a variety of factors: The different types of credit you have, how much credit you use compared with the maximum amount of credit you’ve been extended, how long your credit lines have been open, your payment history, how much new credit you’ve applied for (and how recently) and whether you have judgements, debt in collections, or other pieces of negative credit information. Each of the credit reporting agencies (Equifax, Experian and Transunion), plus other credit scoring companies, like FICO and Vantage, tunes its credit scores a little differently. But in all credit scores, your payment history accounts for at least one-third of your credit score.

You might have noticed that your credit score can rise and fall each month. Because of all the possible variables, similar actions will affect everyone’s credit score in different ways. These fluctuations happen due to charging habits, whether you pay your balance on time and in full each month or carry debt, or if your credit utilization radio has changed. If you increase your debt so that your balance exceeds 30% of your maximum available credit, it can depress your credit score.

It’s important to know what will happen to your store card once it converts into a cash back card. Will the history of this credit account continue when the card converts? If not, and the credit reporting bureaus treat it as a new card, that could hurt your credit history. If you decide to cancel the card, and it’s your oldest account, we suspect that your credit score would take a temporary hit for several months.

The simple answer is to keep the credit card, especially if there’s no annual fee. Assuming this card carries forward the history you’ve built up with this account (which you can check with the issuer), there’s no downside.

If you don’t want an extra card in your wallet, then wait to cancel until you buy your new home. After you close, and if you’re sure you don’t need to make another major purchase for a while, you can cancel the card. And, apply for a different one. But don’t cancel a major credit account or apply for new credit just before applying for a home loan. It can temporarily depress your credit score enough to keep you from having your mortgage application approved.

Sam has represented buyers who decided to take on debt during the process of buying a home. These buyers typically financed a new car purchase or started buying things for their new home using their credit cards, only to find out that they crossed some debt-to-income threshold that threw their home purchase into jeopardy.

Those types of transactions can get in the way of your ability to close on a home. Falling credit scores or taking on more debt before closing on a home makes lenders nervous and could easily cause the lender to deny your mortgage application.

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(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)