Does Having A Mortgage Help Your Credit Score?
When buying a home, your lender, real estate agent and even strangers will tell you how important good credit is. It’s true, having a good credit score will give you better mortgage rates and save you money. But what about after you’ve made the big purchase, does having a mortgage help your credit score?
Mortgages And Credit Scores
Having a good credit score is the key to getting the best rates a lender can offer. Mortgage lenders want to be sure you’re financially able to afford and maintain the home you’re going to purchase.
When applying for a mortgage the first thing your potential lender will want to do is pull your credit report. Consumer credit reporting agencies (Equifax®, ExperianTM, and TransUnion®) collect information from creditors nationwide to develop your credit score. Your FICO score can range from a low of 300 to a perfect 850.
The minimum credit score needed to buy a house is between 580 – 620, having a good to great FICO® credit score between 670 – 850 can save you thousands of dollars over the life of your mortgage.
There are two types of debt: installment and revolving credit.
Revolving credit is a line of credit with a fluctuating balance, like a credit card. While you could be paying the credit card payments each month, you can also be adding to the balance at the same time.
The other type of debt is installment credit. Installment credit is a fixed amount of money borrowed with a set monthly payment and a payoff date. A mortgage, student loan, or personal/business loan are all installment credit types.
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How Does Buying A House Help Your Credit?
A mortgage is a great gauge for creditors to determine a homeowner’s credit worthiness over time. The loan length is long and it’s typically the largest asset a person will own. As payments are made consistently and the balance decreases, creditors see that the homeowner is capable of handling the responsibility of a mortgage.
If your current credit report has just a few credit cards, your score won’t be as high as someone with a mortgage and car payment. The mix of revolving debt and installment debt accounts for 10% of a person’s FICO credit score.
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Can Buying A House Hurt Your Credit?
When applying for home loans you will likely see a dip in your credit score due to the hard credit inquiries mortgage lenders must make during the mortgage preapproval process. The Consumer Federal Protection Bureau (CFPB), states as long as inquiries are made by mortgage brokers and lenders within a 45-day window, credit bureaus should see that you’re comparison shopping and the impact should be minimal. Some FICO® models allow 14 days for multiple inquiries to have the impact of just one inquiry, so we recommend limiting your rate shopping to 2 weeks.
It can be tough to watch your credit score lower after being so diligent with finances during the home buying process, but know that your score will bounce back if you continue making good financial choices. Be aware though, it could be as long as 6 months before you’re able to take out a substantial loan.
Other Factors That Can Affect Your Credit Score
- Payment history: Paying your bills on time and in full is one of the best ways to improve your credit score. When you miss a payment or you know you’re going to be late, talk to your creditor and make your payment as soon as possible. You may even find you have a grace period or a repayment option that could limit the negative impact on your credit report.
- Credit utilization: Credit utilization rate makes up a whopping 30% of your credit score and is based on how much of your available credit is being used. Low credit utilization tells lenders that you’re a responsible borrower and don’t rely on credit to support your lifestyle.
- Length of credit history: The length of your credit history is important because it proves you’re able to make consistent payments and it gives lenders some reassurance. The age of your credit is calculated by taking the average of how long all of your accounts have been open. As time goes on, your credit score will see incremental increases due to aging lines of credit in good standing.
- Mix of credit types: It’s important to diversify the type of credit present on your credit report. Having a good mix of both installment and revolving credit shows potential lenders that you’re capable of managing different types of loans and can budget to accommodate those fluctuations.
- Recent inquiries: Credit inquiries for things like a store credit card or a new car can negatively impact your credit. Most credit inquiries result in less than five points off your FICO® credit score. For those with a short credit history, this impact could be greater. But as we’ve stated before, making your payments in full and on time will help soften the blow of a credit score decrease.
Tips For Increasing Your Credit Score After Buying A House
There are a lot of companies that claim they can raise your credit score quickly but remember that developing a good credit score is a process that takes time. Paying your mortgage and other bills on time is the first step to good credit. Keeping your credit card utilization low is another way to reflect your credit worthiness to lenders. Maintaining a good standing with creditors and lenders helps develop a long credit history.
The Bottom Line: Will A Mortgage Help My Credit?
When you initially purchase your home, it may be disheartening to watch your credit score fluctuate. Once you begin making payments and the initial hard credit inquiries disappear, you’ll start to see your credit rise. With the added diversity to your credit mix and the always aging lines you’ve established, your score could reach new heights.
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