Mortgage Affects Credit Score

How Getting a Mortgage Affects Your Credit Score

How Getting a Mortgage Affects Your Credit Score

Having a good credit score is important for major life purchases like mortgage. But what a lot of people don’t realize is the reverse: getting a mortgage affects your credit score. Here’s why.

Each credit score inquiry and loan application may hurt your credit score, so many people wonder whether getting a mortgage is actually good for them. This is not an unwarranted fear. However, the degree to which you worry might be unwarranted.

Overall, there are some potential negative ramifications. Getting a mortgage affects your credit score. At first, you may see a small decrease, but over time your credit score will rise beyond where you started.

What your credit score is made out of

First, it’s important to understand that your credit score is made up of five areas:

  1. Payment History (35%) Whether you pay your bills on time and how much you pay them off every month.
  2. Debt (30%) How much debt you have versus the credit limit and original loan amount.
  3. Length of Credit History (15%) Based on your age, the age of your accounts and the age of each individual account on your credit report.
  4. New Credit (10%) If there’s any new credit such as a newly opened credit account.
  5. Credit Mix  Lenders want to see that you were able to handle many types of credit responsibly. Having a good mix of credit including an auto loan, credit card, and a mortgage will help.

 

How your mortgage may lower your credit score

The mortgage itself will add a credit application inquiry to your new category credit. Once you have a loan, it will count as a new account. Only inquiries from the past year are considered with your credit score. So, that negative impact of checking your credit won’t last for very long.

You might be worried about these inquiries, because naturally you’ll want to shop around to find the best interest rate. There’s a special rule for this particular case. If you apply for more than one mortgage in a two week timeframe, so as to find the lowest interest rate, it only counts as one inquiry. Therefore, you don’t have to worry about shopping around trying to find the best rate. Just make sure you do it quickly within those two weeks.

The new mortgage will also hurt the category of “length of credit history.” So, at first, the mortgage will likely lower your credit score. However, the mortgage will eventually it will look like much less of a new account.

How your mortgage may increase your credit score

For all that negativity, there are also positive impacts, particularly long-term. In fact, getting a mortgage can help all five categories that comprise your credit score.

Provided that you make every monthly payment on time, your payment history category will start to take care of itself. With time, the amount you open your mortgage relative to the original amount you borrowed begins to lessen.

What’s more, with time the mortgage starts to become more of a positive factor in your length of credit history category. It will not stay in the new credit area for very long. Finally, if you’ve never had a mortgage before, getting a mortgage for the first time I have an immediately positive impact on your credit next category. While this category does only account for 10% of your total credit score it can still help you.

Parting thoughts and takeaways

The only way to know how your credit score is going to be impacted is to know what the formula for your credit score is. You might find that on average, your credit score dropped by 20 points when you first buy a home. Yet, it will start to rise after the first few months. After one year, your credit score will more than likely be higher than it was before you took out the mortgage. The reason for this is that, as discussed, the negative impact is immediate but after the first year or so all that negativity becomes a more positive impact.

That said, the most likely impact on your credit score when you take out a mortgage will be minimal but negative at first. With time, it will become much higher and much more positive. As a result, the overall long-term positive benefits will surely outweigh the short-term negative impact. If you’re still worried, you can speak with a credit specialist from a reputable credit repair company. They will be able to assist you in determining how your credit score will change after taking out a mortgage.

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Actions That Lower Your Credit Score

Actions That Lower Your Credit Score

Maintaining a healthy credit score is important for your financial safety. You probably already know that late or missed payments on your credit card bills and loans can lower it, but there are other subtle yet still dangerous things you could be doing that may be jeopardizing your credit score as well. Here’s a list of the biggest ones, so that you can avoid these surprising actions that lower your credit score.

Opening too many new credit cards or loans

Credit history is important. Lenders like being able to trace your credit history back for many years because it gives them more information in order to construct a more accurate creditworthiness profile for you. Having good credit for an extended period of time is an obvious benefit. If you’re closing old credit cards and opening new ones, you’re likely hurting your credit score because it limits how much information lenders can access about you.

Using only one type of credit

Part of your credit score is based on the types of credit that you use. If you use multiple types of credit, from mortgages to credit cards and beyond, this indicates to a lender that you’re an experienced borrower and can responsibly handle loans.

Not using your credit

This might seem counterintuitive, but neglecting to use your credit can actually hurt your credit score. A good credit score comes from using your existing credit intelligently, not from abstaining from using it. You should regularly use your credit, such as by using your credit card for daily expenses. Make sure to pay off all of those balances though!

Using too much credit

This tip might seem obvious, but sometimes even if your balances don’t exceed your available credit, your credit score might be in jeopardy. If your balances get too close to your available credit (for example, if you have a $4000 balance but a $5000 credit card limit), this tells lenders that you’re cutting it a bit close and might lower your credit score. Keep your credit expenditures somewhere in the middle, and make sure you pay off your balance every month (or at least most of it).

Having wrong information on your credit report

While rare, errors can still pop up on your credit reports. Errors that can hurt your credit score include reports of late payments or unpaid loans that you never made. Even more common errors, like an incorrect address, can be annoying to deal with. It’s important to pull a report once a quarter and make sure all of your information is correct. You should also monitor your credit score to see if anything unusual happens. Most major credit card providers will give you your score if you ask.

Want more information?

Above were some surprising actions that lower your credit score. If you want more, check out these tips for What NOT To Do To Increase Your Credit Score.