It sounds crazy, you take on new debt and it may help your credit score?
It’s true, though.
Taking on a mortgage may lower your credit score initially, but over time, it will help it like no other debt can. Your mortgage is likely one of the largest debts you’ll have, so knowing how it affects your credit score long term is important.
The Initial Drop
Your credit score may drop when you first apply for and take on a new mortgage. I know that’s disheartening after you spent so much time maximizing your credit score. Don’t worry, though, it’s a temporary drop.
According to Experian, hard inquiries (when lenders pull your credit after application) only affect your credit score for a few months. The inquiry will still appear on your credit report for 2 years, but the damage to your score dissipates after only a few months.
The new rather large debt also causes your credit score to drop. You’ve just taken on this several hundred thousand dollar debt and don’t have a payment history. The credit algorithms don’t know better than to drop your credit score due to a lack of information.
This is only at the start of the process, though.
How a Mortgage Helps your Credit Score
Once you get through the initial few months, your credit score may benefit from the new mortgage. Here’s how:
- Making your payments on time – If you make your mortgage payments by their due date each month, it will reflect on your credit report and may increase your credit score.
- It helps age your credit – Your credit’s age makes up 10% of the credit score, which isn’t a lot, but it has an effect. Since most mortgage terms are for 15 – 30 years, that’s plenty of time to help your credit score increase due to age.
- It diversifies your credit – A good credit mix also helps increase your credit score. Since a mortgage is installment credit rather than revolving credit, it may help increase your score if you have a lot of credit card (revolving) debt.
Don’t Miss Payments
While a mortgage can be great for your credit score, it can hurt it if you aren’t careful. Make your payments on time as your payment history is the largest part of your credit score. If you miss a payment and pay it more than 30 days late, the lender reports it to the credit bureaus.
Even one 30-day late payment may drop your score as much as 100 points, depending on where your score started. Higher scores are often more affected than already low scores.
Overall, taking on a mortgage can help your credit score, as long as you are careful. Put in the hard work and maximize your credit score before you apply and then try not to worry when your credit score dips slightly. It will come back with good payment habits, allowing the mortgage to help your credit score overall rather than hurt it.
