When you are about to apply for the biggest loan of your life, a home mortgage, it's natural to think that reducing other channels of debt will make you look better in the eyes of lenders. Same with a refinance—probably the second biggest loan of your life.

The reasoning goes like this: If you're about to owe a lot of money to one creditor, wouldn't that creditor like to know that you are not able to run up debt to someone else? Many people, ahead of applying for a mortgage or refinance, think that closing a credit card account should raise their credit score.

But many people are wrong.

Cards and Scores

People think that closing a credit card should improve their score because they have removed one more possible debt trap in their life. Since they can't rack up charges on that old card anymore, they think creditors will see them as a better risk. Now that they have fewer ways to get in over their head, shouldn't their score improve?

Creditors don't see it that way. Strong scores go to those who barely use their credit. Keeping a credit card open even though the card is tucked away in a drawer and you hardly think about it actually makes you look better in the eyes of lenders. You have proven you can resist the temptation of available credit.

FICO, the firm behind the credit score formulas, has done exhaustive analysis on this subject: "Over the years, FICO has consistently found that a characteristic of low-risk consumers is they have access to significant amounts of credit but use it sparingly. This correlation has been proven mathematically beyond question."

30% of Your Credit Score Comes From Your Debt Usage

Your score probably won't change after you close a credit card, and it may even drop slightly. About 30% of your FICO score is based on your debt usage, or debt utilization ratio; that is, how much debt you carry divided by how much debt you could carry. (More on the debt utilization ratio below.)

You can expect less impact on your score from closing a credit card when you routinely keep low balances on all other cards. This is because when your outstanding debt is habitually low, lowering your available credit by closing an account won't make much difference to your ratio. It's like sitting a smaller child on one end of a seesaw; if you also swap a smaller child onto the other end, the tilt of the seesaw will stay about the same.

Before applying for a mortgage or a refinance, pay your credit cards down. Preferably pay them off, but keep the accounts open anyway.

“One of the most important factors lenders consider is your credit score. FICO credit scores range between 300 and 850. If you have a FICO score of 740-760 or higher, lenders will be more eager to offer you the best deals.”
   —Suze Orman

When It's Smart to Close a Credit Card, and How to Do It

There are a few good reasons to close a credit card. You may consider closing a credit card because you never charge on it and it has a high annual fee. Or perhaps you opened the card for perks that made the fee worthwhile, like rental car credits and airline upgrades, but over the years the perks have dwindled or your lifestyle no longer creates as many opportunities to enjoy them. It's harder for you to justify paying the fees every year, so you'd like to close the account. Or maybe it was a joint account, and now you're getting a divorce.

If any of those good reasons apply to you, take these four steps to close a credit card the right away.

1. Pay down all other balances first.
Get all your account balances low first. Get them to $0 if you can, so you can stop paying interest entirely. Having low balances across all your cards lessens the impact that closing one account will have on your ratio of debt to available credit. That ratio constitutes about 30% of your FICO score.

Debt utilization formula: Here's an example of the ratio in action. Let's say you have $9,000 in total available credit across three accounts. One card balance is $0, while the other cards have balances of $1,200 and $1,400.

Total debt ÷ total available credit = debt utilization
($1,200 + $1,400) ÷ $9,000 = 29%

A ratio of 29% is good. Financial advisors recommend keeping your ratio under 30%.

Closing an account will shrink your available credit. Say the limit on the empty card is $3,000. If you close it, you drop your available credit from $9,000 to $6,000. Your debt utilization climbs to 43%.

($1,200 + $1,400) ÷ $6,000 = 43%

Before closing any account, you should pay down all the balances. This way, after you close the account, your debt utilization ratio will remain strong because although you shrank your available credit you also shrank your debt.

To continue with the above example, once you've paid down the balances to $1,800 in total, you can close the unused account and still be at 30% debt utilization.

$1,800 ÷ $6,000 = 30%

2. Take advantage of any perks the card owes you.
You might have rewards waiting on the card, like ride-hailing app credits or airline miles. You earned them, so strive to use them before you close the account.

3. Call the credit card company to cancel, and ask for written confirmation.
Your call might be transferred once or twice, but eventually you'll get connected to someone who can verify that your balance is $0 and then close the account. Ask for written proof that the account is closed (not hibernated, not suspended, but closed). As proof, don't accept an email that only says something like, "It has been a pleasure handling your request today." You want to see the word closed.

4. Check your credit reports over the next 4-6 weeks.
Make sure the account is shown as closed by the cardholder, not that it has a balance of $0 (only an open account can have a balance). Your credit reports should say, "Closed by cardholder."

The only place for a truly free credit report: Order your free credit reports on the government-backed site annualcreditreport.com, the only site authorized by the FTC to give you free credit reports. Follow that link only; if you try searching the web for free credit reports, you'll get a slew of paid credit-monitoring offers disguised as free reports.

The Card's History Still Follows You

Don't worry that closing a credit card will also close one chapter of your fine credit history. Your responsible use of the card and your unbroken string of on-time payments won't be forgotten. FICO considers the good history of accounts for 10 years after closure.

The flipside of this, of course, is that bad history on a credit card won't go away either after you close it. Thinking that you can shake a bad track record is another wrong reason for closing an account.

Conclusion

Your credit cards matter in a mortgage (or refi) application, but less is not necessarily more. By itself, eliminating a card won't raise your credit score because having fewer cards means less available credit. You want to pay down all balances but not shrink your available credit. There are good reasons to close a credit card account, as we've discussed above, but getting ready to apply for a mortgage or refi is not one of them.