If you've ever applied for a loan, a credit card or even signed up for a new cellphone contract, you already know that your credit scores can make or break whether you are approved. Several services provide credit scores, but the ones that really matter are the three-digit FICO scores used by the Fair Isaac Corporation. Your FICO scores fluctuate regularly as the information on your credit report changes, and a new mortgage could have either a positive and negative effect on your scores.
Before approving your mortgage application, your lender must determine whether you'll make a reliable customer or are too risky to work with. The lender does this by pulling your FICO scores and credit reports. When any lender or creditor pulls your credit reports in connection with a financial transaction, your credit takes a hit. The damage is generally no more than five points, and you catch a break for rate shopping. Provided you find a loan within 30 to 45 days, each lender inquiry counts as a single credit pull.
Balance of Accounts
Like the Coca-Cola formula, the scoring formula Fair Isaac uses to determine your FICO scores is a trade secret. Information regarding the impact different entries have on your scores, however, is public. To get the most out of your FICO scores, your credit report should reflect both installment accounts, such as your new mortgage loan, and revolving accounts, such as credit cards. A balance of both revolving and installment accounts shows lenders that you can successfully manage both types of debt. If your new mortgage is your first installment loan, its very presence on your credit record can increase your FICO scores – albeit only marginally. The impact a mortgage has on your credit scores will vary depending on the other information within your report. Your credit balance accounts for 10 percent of your total FICO score.
After your mortgage appears on your credit report, you are the one who determines whether its impact will be positive or negative through the payments you make. If you make each mortgage payment on time, your credit report will reflect that fact. Your scores will increase over time and you’ll pose a low risk for future lenders. Miss a single payment, however, and you're in trouble. A single missed payment can hit you for anywhere from 60 to 110 points. The higher your FICO scores are, the more points you'll lose when you make a mistake. If the lost points weren't bad enough, a missed payment haunts your credit report for seven years.
Your mortgage continues to affect your FICO scores, either positively or negatively, until it falls off your credit report. This does not occur while the account is still open. As long as your mortgage is active and you're making payments, the trade line remains on your credit report. When you pay off a mortgage that is in positive standing, it lingers on your credit report for another 10 years before the credit bureaus remove it. If you lose your home to foreclosure, your mortgage trade line and the foreclosure record only remain on your credit report for seven years before being removed by the credit bureaus.
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