Mortgage Confidential: closing an account can hurt your credit score


The old adage, if 10 years ago makes for an adage, was to monitor your credit and close down any unused credit accounts. Before the advent of "instant" mortgage approvals and automated underwriting systems, loans were actually evaluated completely by a living, breathing human being: an underwriter.

When a borrower would make an application for a home loan, an underwriter would look at other credit accounts. Some that had a credit limit with a low or zero balance. If the potential borrower had any past history of running up his credit line to or beyond his credit limit, it would make an underwriter nervous. What if a borrower who was pushing his debt ratios to qualify for a home loan would suddenly go out and buy a boat, a new car and take a trip to Cozumel right after he closed on his mortgage loan? Suddenly that new homeowner might not have the ability to pay his brand new mortgage.

From another prudent point of view, having old, unused credit accounts simply should be canceled should anyone ever attempt to steal an identify or otherwise charge something on an old card. But that's old school. Here's the new school.