Re: House Loans and Down Payments
Level 1

Home loans

Greetings everyone!

I'm not sure if this has been covered, but Article and Carl make great points. I would like to clarify this for anyone trying to save/boost their credit to get that down payment, loan, or any financial endeavor.

So, closing credit accounts can slightly, negatively impact your credit score for a short period of time. However, only stopping to use a credit line (while making payments), without closing it, will actually reduce your debt and effectively improve the credit score.

Why is this? There are a few reasons, but the main, and most impactful is that the credit score is affected by the ratio between available credit and used credit. ie. A card has a credit line of $1,000 and a balance of $500. Assuming this is someone's only card, they have a 50% consumption rate: they are using half the credit provided to them. Someone who shows a history of maxing out credit or having a rate of 100%, 1:1 available credit to used credit, will have an unfavorable impact on their overall score. Now, this is only one components; it is completely possible for someone to use a large amount of their credit consistently but if they're doing other positive things like paying regularly, they may not notice any negative effects because of the offset of the positive.

Hope that was helpful! With that said, if someone has debt on their credit lines, ending use (not accruing additional debt) and continuing to pay them down will give this individual a lower percentage of use and therefore reflect better on their credit history and report.

Lastly, for someone not worrying about that credit score mumbo jumbo, but they just want to save money! This process helps them as well because with credit comes paid interest. So, the sooner that debt gets paid down, the less interest will be paid and the more one can save. In addition, once in the position to do so, use as much credit as you like and if the balance is paid off before the interest is scheduled to kick in you will not have to worry about credit taking more of your money and still get the benefits of owning a card (card points, miles, longer credit history, growing credit score, etc.).

Actually, very last thing I would like to add in is that the longer your credit history has a positive impact on credit scoring; just as being over 21 or 25 could give you a better rate on a rental vehicle. When you completely close a line of credit it no longer is involved in the length of the ongoing open history. Let's say you have to lines of credit, one 10 years old and the other two. If you decided to close the original line (10 years old), you would be left with only two years of open credit history. Due to longer history giving a positive impact, shortening the history effectively has a negative impact.

Moral of the story, if you are trying to save and build credit, responsible credit use is a great start! But for some that may mean leaving those credit lines open, paying them down, and not using them until they are payed down. For others it may mean using them all the time and making sure that "Credit Utilization" rate is not too high.

I sure hope this was was helpful.....and not too long.

Best
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