How a mortgage affects your credit score in the short and long term

How a mortgage affects your credit score in the short and long term

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  • After closing on a mortgage to buy a house, my score dropped by 11 points, but I’m not too worried, because I understand why my score dropped and how a home loan could actually improve my credit in the long run.
  • Before approving me for my mortgage, my lender did two hard pulls on my credit, which lowered my credit score by about two points each time.
  • My home loan also increases my total debt, which increased my credit utilization ratio. This ratio accounts for 30% of my FICO score, and a lower credit utilization is better.
  • As long as I make on-time payments on my mortgage, my credit score could actually get even higher in the long run. Having a mortgage also improves my credit mix, which can positively impact my score.
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During the two years I spent preparing to buy a house, aside from saving up money towards my down payment, I also knew that I had to start babying my credit score. I made a point of making all my payments on time and paying my balances off in full every month. Plus, I made sure to avoid applying for any new credit cards or line increases.

In the end, my hard work paid off. When I applied for my mortgage, I had my highest credit score ever and I was able to use it to secure an affordable interest rate on my loan. What I wasn’t quite prepared for was the fact that my score would drop after closing on my new home, just as I had gotten used to having great credit.

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Despite the fact that my score has taken a dip, I’m not too worried. In fact, I think taking on additional debt in the form of a home loan will actually help improve my score in the long term. Here’s a closer look at why I’m betting I’ll ultimately see my score go up.

How credit scores are determined

Before getting into specifics, it’s important to understand how credit scores are determined. The reality is that your score with each of the credit bureaus is based on a mix of factors that each account for a different percentage of the number you’re given.

This is how your FICO score breaks down:

Payment history (35%): Whether or not you have a history of making your payments on time has the greatest impact on your overall score. To that end, it’s crucial to make sure that you pay your credit card bill on time, every time.

Credit utilization rate (30%): Your credit utilization ratio looks at what percentage of your total available credit you’ve used. For the best results, you should try to keep this ratio under 30% whenever possible.

Length of credit history (15%): While you can’t really do much to speed this one up, the longer your accounts have been open and you have a history of making timely payments, the higher your score will be.

Credit mix (10%): Credit scores take into account the total amount of outstanding debt that you have, as well as the different types of credit that you use. Your FICO score tends to favor having a variety of loan types on your credit report, including installment loans and revolving credit.

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Recent applications (10%): Every time you apply for a loan, the lender does what’s known as a “hard pull” on your report in order to check your credit score. Each pull will ding your score by a few points and stay on your report for about two years. Having too many pulls on your report at one time can also hurt your score.

Why my score took a temporary hit

Throughout the process of buying a house, my score dropped 11 points in total. However, given the above information, it honestly makes sense that it took a dip. In applying for and eventually receiving my mortgage, several things happened that impacted my score, including:

New hard pulls on my credit: My lender pulled my credit twice during the application process, once when I initially applied for the loan and once right before the loan was issued to ensure that nothing had substantially changed. Each time there was a credit pull, my score dropped about two points.

New open account: Opening a new account can also negatively impact your score in the short term. In this case, it did because it added to my overall debt. Before getting a mortgage, I only had a few thousand dollars’ worth of student loans left to my name. Now, I also owe hundreds of thousands of dollars in housing debts.

Why I’m betting I’ll have an even better score in the future

Ultimately, though, I’m guessing that the drop in my score will only be temporary. In fact, I have reason to believe that, over time, taking on more debt in the form of a mortgage will actually make my score higher than it was when I was approved for my loan.

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It all comes down to the following factors:

Updated payment history: According to Experian, the dip in scores from opening new accounts is only temporary. It advises that as long as I continue to make timely payments on my new account, my score should rebound shortly.

Lowered amount of total debt: As I continue to make payments toward my mortgage, the total amount of debt that I have to my name will go down, which will help my credit utilization ratio.

Better credit mix: By adding a new installment loan to my credit report, I am diversifying. Before I got a mortgage, the bulk of my profile was made up of revolving credit or credit cards. Now, the distribution is more even.

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