As you start the home buying process, you quickly realize the importance of your credit score. Since many people cannot always pay cash for the entire home purchase, they must obtain financing from a lender. When applying for a home loan, most lenders require a solid credit report. As with any major line of credit, a mortgage appears on your credit report. Therefore, many may wonder how a home loan affects their credit score. In short, taking out a mortgage may drop your credit card initially, but long term, it can boost your score with regular, on-time payments.
Does buying a home hurt your credit score?
A recent LendingTree study states that getting a mortgage typically causes one’s credit score to fall by more than 20 points on average across the 50 largest metros in the United States. Furthermore, the study says that it typically rebounds to pre-loan levels within a year.
How a mortgage benefits your credit score
When mortgage payments are made as agreed and on time, it can help build your credit over time. On the flip side, if you miss a home loan payment, you will typically see a drop in your credit score. Two ways a mortgage can benefit your credit score include:
Add to credit history: Typically requiring 15 to 30 years of monthly payments, a mortgage allows plenty of time to build your on-time payment history as well as the age of your credit.
Diversifying your credit: Anytime you use credit, such as credit cards, auto loans, or mortgages, it will affect your credit score. In the credit world, credit cards are referred to as revolving credit whereas a home loan is an installment loan. Therefore, adding a mortgage helps diversify your credit.
4 don’ts to ensure your credit score recovers quickly after getting a mortgage
While a mortgage temporarily drops your credit score, keeping clean credit will help it bounce back. Maintaining a good credit score ensures you qualify for the best rates when making other purchases, such as a vehicle or opening a new credit card. To help your score recover quickly after buying a home, avoid these 4 don’ts:
- Missing a payment or making late payments: On-time payments is one of the major determinates of your credit score.
- Having high balances on your credit cards: Another major factor affecting your credit score is credit utilization, which is the amount of available credit you’ve used. While you may have a large line of credit, fully utilizing it can negatively affect your score. Instead, it is preferred to use only a portion of it.
- Taking on new credit: It is best to wait for your score to recover before taking on new credit to help keep your score on an upward climb.
- Closing a credit card: Since the length of credit history is a factor for calculating your credit score, usually, keeping older accounts open is better than closing them.
Have additional questions about your credit score or qualifying for a home loan? Contact the Highlands Realty team for a list of local lenders who are happy to answer your financial questions.