How Paying Off Your Mortgage Affects Your Credit Score

Borrowing, Credit Rating, Home Purchase Loan

Congratulations! You’ve just finished paying off your mortgage – probably the largest debt you’ll ever have in your life. Should you expect your credit score to increase as a result? Not necessarily.

Your credit score is calculated from your credit report, a history of all of your borrowing and payment activity. While your mortgage was probably a huge part of that history, it’s just one part. Credit reports also consider other installment loans, your credit card payments, and any payments for non-borrowing related charges (like cable or utility bills) that have gone into collections. Every account matters and contributes to your credit score.

Consider the factors that go into calculating a credit score, starting with payment history – the most influential factor. Mortgages require regular payments for a long time. With those payments removed, that’s one less regular payment that proves you’re handling credit responsibly. Your credit score may dip slightly as a result. If you’ve been less responsible with other payment paths, your score could drop further.

Paying your mortgage off early will save on interest charges, while making payments on your regular schedule could keep your credit score up. However, your credit score shouldn’t play much of a role in deciding whether to pay a mortgage off early. Calculate the economic tradeoff between interest savings versus other uses of your money (such as paying down high-interest credit card debt).

Credit utilization, the amount of credit you’re using compared to your collective credit limits, is the next most important credit score factor. Paying off your mortgage should have a positive effect on credit utilization – unless you counteract that by running up your credit card balances. By definition, you’re using all the credit involved with an installment loan. Credit cards can serve as a cushion of available credit as long as you keep balances low. Experts suggest staying below 30% of your credit limit.

The next two important credit score factors are the average age of your accounts and the types of credit that you have. Having accounts in good standing for many years indicates stability. Similarly, if you can show that you’ve handled both installment loans (like mortgages or auto loans) and revolving credit (like credit cards) responsibly at the same time, lenders are more confident in lending you money.

Paying off your mortgage is certain to drop the average age of your accounts. If you don’t have any other installment loans, your credit score may take another small hit. However, your credit score will recover from these small hits if you manage your remaining credit wisely. (You certainly wouldn’t want to take out another installment loan just to raise your credit score.)

Total debt is also considered in your score. Paying off your mortgage is a clear positive for total debt as long as you don’t replace it with new large debts.

The other credit score factor is your recent credit behavior, such as how recently and how often you’ve applied for new credit. That’s independent of paying off your mortgage.

Obviously, you want to pay off your mortgage regardless of the effect on your credit score. However, you should know which direction your credit score is likely to go as you approach the final payments. If your score is likely to drop, you can take steps to minimize the damage – or you may decide that a minor and temporary drop in credit score isn’t worth further action. Manage your remaining credit properly, and the mortgage payoff won’t be a significant factor.

You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

Photo ©

Advertising Disclosure

Source link

Products You May Like

Leave a Reply

Your email address will not be published. Required fields are marked *