Housing Counselor Certification (HUD) Practice Exam

What negative impact results from a client closing credit card accounts while preparing to buy a house?

1. It eliminates opportunities for new credit

2. It increases credit utilization, causing a negative impact on the credit score

3. It decreases the overall credit limit available

4. It decreases the client's credit history length

The correct answer is: It increases credit utilization, causing a negative impact on the credit score

Closing credit card accounts can have several negative implications for a client's credit profile, particularly in the context of preparing to buy a house. When a client closes credit card accounts, it often leads to increased credit utilization. Credit utilization is calculated by taking the total outstanding credit card balances and dividing it by the total credit limit available. If a client closes an account, their total available credit limit decreases, while their outstanding balances may remain the same. This results in a higher utilization ratio, which can negatively affect the client's credit score. A higher credit utilization ratio indicates to lenders that a client is using a larger proportion of their available credit, which can be seen as a sign of financial strain. Lenders typically prefer a lower utilization ratio, as it suggests responsible credit management. Therefore, increasing credit utilization by closing accounts can hinder a client's ability to secure favorable mortgage terms when applying for a home loan. While the other options provide related concepts regarding credit management, the direct consequence of closing credit card accounts in this scenario particularly pertains to the impact on credit utilization and subsequently the credit score, making it the most relevant outcome for someone preparing to buy a house.