Whether you’re hoping to buy a house in the future or you’ve just purchased your dream home, you’ve probably heard repeatedly that having the best credit score possible should be a priority for homebuyers. What happens after the sale? Should you still be concerned about that three-digit number? Does a mortgage help your credit score?
Why Credit Scores Matter
When you’re trying to get a mortgage, your credit score is one of the factors that lenders weigh when determining whether or not to approve your application. A strong credit score can also help you secure a better interest rate on your mortgage loan, and a better interest rate means that you’ll ultimately pay less to borrow money.
However, becoming a homeowner doesn’t mean that you can safely ignore your credit score. It still matters. As The Balance reports, your credit will have an impact on many common tasks. Are you in the market for a new vehicle or interested in starting your own business? Auto and business loans require good credit. Are you job hunting or in the running for a promotion? Some employers will review your credit history before hiring or promoting you, especially for executive or financially related positions. Do you need utilities? Some electric, water, cable, telephone, and cell phone providers will check your credit first. Frankly, it’s always a good idea to keep an eye on your credit score.
Does a Mortgage Help Your Credit Score?
What impact does a mortgage have on your credit score? To some extent, that depends on you. After all, using credit is essential if you hope to boost your credit score, but it only helps if you do so wisely. Using a credit card for purchases and making payments regularly will generally lift your credit score; overspending and fumbling your payments will have the opposite effect. In the same way, your new mortgage payments offer an opportunity to show that you can manage your finances and use credit responsibly. However, it’s not all about you. Even if you do everything right, getting a mortgage can still have both positive and negative effects on your credit.
How Credit Scores Work
The score most frequently used by lenders, the FICO credit score, is calculated by reviewing financial information in a variety of categories. Being aware of the data used to reach your score can help you understand how getting a mortgage will impact it. According to The Motley Fool, the following factors combine to create your credit score:
- Your payment history accounts for 35 percent of your FICO credit score.
- Your total owed, including both the actual amount and how that compares to your available credit, accounts for 30 percent.
- The length of your credit history determines 15 percent.
- Your new credit determines 10 percent.
- The mix of credit types that you’ve used accounts for 10 percent.
How a Mortgage Affects Your Credit Score
Does a mortgage help your credit score or hurt it? As Investopedia explains, it can do both. Initially, it will have a negative impact. There are two reasons for this: First, applying for a mortgage requires a hard inquiry into your credit, and that inevitably lowers your score a little. Second, when you take out a mortgage, you add a large debt to your credit report. Until you’ve had some time to establish a payment history for it, your credit score will dip. If you make your payments properly, your score will likely rebound in a few months.
How does a mortgage help your credit score? As Credit.com indicates, your payment history accounts for a huge chunk of your credit score, so simply making your mortgage payments will help build your credit score. As an added bonus, mortgages are installment loans, so having one helps to diversify your credit mix, which can further boost your credit score.
At PrimeLending of Kansas City, you’re never just a number. We thrive on helping our customers reach their housing goals, so we listen carefully to learn what you hope to achieve and how we can put our expertise to work for you. We offer user-friendly guidance, personal attention, and cutting-edge technology to help you navigate the home loan process. Contact us today to find out more.