@cbarnette wrote:
They want me to close the accounts to ensure they aren't used again. Because my score isn't the problem in regards to getting the loan, it's my DTI. I read the closing credit cards forum and it was a little confusing because in one part it says , "Closed CC accounts (in good standing) with balances do factor in utilizations percentage calculations whereas closed CC accounts with $0 balances do not." but in the earlier example, it shows a credit card being closed and paid off but the utilization ratio got worse. If I close the five accounts and pay off the balance, isn't it still going to affect by DTI and potentially cause my score to drop. The total balances on the five cards are only 1,700 but the total limits are $14,700. My thinking is that $14,700 is a high enough amount to have an adverse affect. I don't have a problem paying off the accounts but I don't want to close them if they will hurt me.
Yes, this can be a little confusing. Here's the way it works.
It is possible to close a credit card account with a balance still on it. In fact, this is something that a lot of consumers are doing when they get notice of an increase in their APR - they "opt out" of the APR increase, which requires them to close the account. However, if there is still a balance owed, even if the account is closed, the original credit limit and balance will still be used in the calculation of utilization.
If the above weren't true, then there would be a loophole by which someone could suddenly decrease their utilization. Let's say that I have two credit cards, one with a CL of $8000 and one with a CL of $2000. Let's also say that the $8000 CL card is maxed out and the $2000 CL card has a zero balance. My utilization is 80%. If I were to close the maxed-out card and if it were completely removed from the calculation of utilization, then my utilization would instantaneously go to 0%. This clearly doesn't reflect reality, and the FICO formula takes this into account. In this case, this is a closed account WITH a balance, and so it factors into utilization.
On the other hand, if the closed CC has a zero balance, then there's no justification for the former CL to be included in utilization, because that CL isn't being used at all and is no longer available to the consumer. So, closed accounts with zero balances are not included in the utilization calculation. In the example given in the Closing Credit Cards thread, the account is closed AND paid off - it is left with a zero balance - so this latter scenario applies.
I think you're confusing DTI and utilization. Utilization is a calculation of your total CC balances divided by your total available credit limits. Your DTI ratio, on the other hand, is a calculation of your monthly payments to your credit accounts (minimum CC payments, student loans, auto loans, personal loans, mortgages) divided by your monthly gross income. So whereas closing down and paying off several CC accounts could hurt your utilization calculation (the denominator [CL] in this calculation is smaller), this action will actually lower your DTI ratio, since you would no longer have any monthly payments due for your closed and paid-off credit cards.
DTI is not factored into your FICO score at all. The FICO score does not include any information about one's income. But DTI is still important for mortgage qualifying, because if someone's DTI is too high, then the underwriter might conclude that the borrower is at increased risk for default due to excessive credit obligations. But utilization is important, too, because it can affect one's FICO score.
If you close down these accounts, what would your utilization go to?
