Thanks for visiting The Mortgage Reports. To stay absolutely current on mortgage markets and important guideline changes, be sure to take my free daily email alerts.

It happens a lot.  After feeling overwhelmed with credit card debt, a person finally pays their accounts down to a $0.00 in hopes of improving their credit and their cash flow. 

Then, the calls his creditor and cancels his credit card account.  This is a fatal credit scoring mistake.

In our Culture of Consumption, it may seem strange that to cancel a credit card could send your credit score plummeting; it's pretty well known that many people live beyond their means using credit cards. 

For as many people that use credit cards for consumption, there are many more that use credit cards for emergencies.  These types of debtors maintain a very low balances and have large available credit lines upon which to draw in the event of emergency.

Emergencies come in many forms:

• Job loss
• Death
• Illness
• Divorce

And having a "cushion" in the case of an emergency can help a person stay solvent in a time of crisis. 

Let's think like a mortgage lender for a moment.  The relative size of a cushion like this is pretty important to lenders because if things hit the fan, a homeowner with a lot of available credit can still stay current on his mortgage. 

You can bet the lenders care that credit lines are big!  Is it any wonder that 30 percent of your credit score is tied to the cushion?

Utilization of credit is measured by the ratio of (total credit used) to (total credit available).  If a person has 5 credit cards, each with $5,000 in available credit, the total credit available is $25,000.

Now, if that person carries a $1,000 on each of the five card, the total credit used is $5,000 and the total credit utilization is ($5,000)/($25,000), or 20%.  This is considered to be a strong ratio for credit scoring purposes.  An ideal ratio is 35% or less.

For every card cancelled, though, the available credit decreases, pushing the utilization ratio higher.  Closing one card changes the math to ($5,000)/($20,000), or 25%.  Closing two pushes it to 33 percent.  Closing three makes is 50 percent.

When you're done with a credit card, don't close it out.  Instead, use it sparingly.  Maybe buy a tank of gas once a month, or a pack of gum or something.  That way, the credit card company will continue to report that you're active, and your utilization ratio can remain as low as possible.

---

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.