For many people, a mortgage is their largest debt, and looking at that huge number every month can product major anxiety. But paying off your mortgage early won't necessarily improve your credit. While it's unlikely to drastically harm your credit, it could lower your credit score a few points. This all depends on what else is on your credit report, your bill-paying history and your overall debt load, so the short answer about whether paying that huge mortgage off will affect your credit rating is that it depends.
Credit Score Elements
A credit score is determined by five elements, and your mortgage payoff can affect each of these components differently depending on your specific situation. The most important element is payment history, which is a measure of how frequently you've paid bills on time. Next is "debt utilization," which is just a fancy term for how much of your available credit you've actually used and whether you've maxed out your credit cards. The age of your accounts counts for much less than these two factors but is still an important part; if you've had credit for a long time, your score likely will be higher. The two smallest factors are the mix of different types of accounts and credit inquiries. A mix of different types of accounts will improve your score, and applying for lots of credit cards or loans at once will lower your score.
Paying off your mortgage will lower your overall debt, which could improve your score. But if your credit cards are maxed out or if you have lots of student loans, the improvement might be only very slight. Further, when companies check your credit score, they tend to care less about mortgage debt than they do about credit card debt, so eliminating your mortgage debt might not improve your credit worthiness as much as you'd like.
Every time you pay your mortgage on time, you're doing something good for your credit. But if you pay off your mortgage, your history of timely mortgage payments will fall off your credit report in seven years, removing a positive item. This could put a slight dent in your score down the road, particularly if you don't have other credit accounts.
Because having a variety of accounts can improve your credit score, eliminating your mortgage account could slightly lower your score. If you don't have other credit accounts that you are regularly paying, or if you have negative items such as a charge-off or judgment, paying off your mortgage could also hurt you. If you've previously missed payments on your mortgage, it might be better for your credit to re-establish a long history of timely payments rather than paying it off. Conversely, if you have several other accounts that you are paying as agreed, paying off your mortgage might make it easier to make larger payments, to get out of other debts and to avoid missing payments, all of which can improve your credit.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.