Tips On How To handle Credit Accounts Before Applying For A Mortgage

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The Federal Savings Bank offers a couple tips on how to handle credit accounts before applying for a home loan.

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When homeowners close their accounts, their average age of credit also drops, which lowers their score.

When applying for a mortgage, The Federal Savings Bank, a Midwest based veteran owned lender, strongly encourages home buyers to make sure their credit report is clean before allowing banks to check their scores. While there are plenty of ways to improve credit ahead of time, closing accounts isn't a catch-all solution.

Although home buyers believe that paying off their debts and closing accounts could raise their credit score, they should be careful about the steps they take right before sending their mortgage application. One of the worst things mortgage seekers can do is close their accounts, which will not improve their FICO score.

Here are two tips on why home buyers shouldn't close accounts:

1. Accounts help build positive payment history
Although potential homeowners would want to avoid a high level of debt, closing their existing credit accounts might not help them in the long run. Payment history accounts for 35 percent of a FICO credit score. Having some debt is good for credit scores because paying off amounts owed allows consumers to grow their history of on-time payments.

When homeowners close their accounts, their average age of credit also drops, which lowers their score.

2. A good mix of credit is essential
A mortgage is known as an installment loan, which is an important type of credit. Consumers likely already have a different credit type called revolving credit. The mix of the kinds of credit home buyers have on their credit reports is a crucial way for lenders to determine whether applicants will be able to handle this new debt. However, if home buyers close accounts for revolving credit, they no longer have a good mix of credit, which could in turn lower their score.

Contact The Federal Savings Bank, a veteran owned bank, to learn more about mortgages.

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Giorgio Urbano Ferrero
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