Does a Mortgage Help Your Credit?

Your credit is important when you want to borrow money because lenders want to make sure you're creditworthy. If you have a home mortgage, its effect on your credit will depend upon how new it is, how high the balance is, the balances on your other debts and whether you have a good pay history.

Tip

Your credit after buying a house will improve over time if you make your payments regularly and don't run up your other debts.

Why Have Good Credit?

Your credit history is important if you plan to engage in modern commerce. Potential creditors will review your credit history to determine whether they should loan you money based upon the type of borrower you are. Your credit history can affect your ability not only to open a credit card, but also to buy or lease a car, find an apartment, buy a house and sometimes even get a job, depending upon the nature of the work.

What Is a Credit Score?

A credit score is a number assigned to your credit history by a credit reporting agency. The higher the number, the better your credit. Each credit reporting agency has its own algorithms for calculating credit scores, although typically, your score won't vary much from agency to agency if the agencies are using FICO.

The three largest agencies – Equifax®, Experian® and TransUnion® – use the FICO model for credit scores, and 90 percent of all lenders prefer using FICO scores to make lending decisions due to its uniformity.

How Credit Scores Are Calculated

Your FICO score is based upon algorithms that analyze the information in your credit report and decide how risky it is to lend money to you.

Your FICO score is based:

  • 35 percent on pay history. If you make your payments regularly and on time and have no missed payments, your score will be higher than it would be if you've been delinquent.
  • 30 percent on how much you owe in total. If all your credit cards are maxed, your score will be lower, even if you pay on time.
  • 15 percent on how long you've had credit. Your score may be lower if you're new to the borrowing game and have only had credit history for a short time.
  • 10 percent on the type of credit you have and whether it's a mix of different types of debts. Your score looks better if you have a variety of accounts, like credit cards student loans, car loans and mortgages.
  • 10 percent on how many of your accounts are new accounts. Opening several new accounts in a short span can ding your credit score.

Your credit score can also be affected if you have a lot of new inquiries. If you've been applying to a lot of different places for credit, each time a potential creditor checks your report a notation is made, and your score can decrease.

Credit After Buying a House

When you buy a house and take out a mortgage loan to pay for it, the mortgage will affect your credit. Whether the effect is negative or positive will depend upon your overall credit history and whether you pay your mortgage on time.

Negative Credit Effect From Mortgage

If your credit score dropped after a mortgage application, a few different variables may be at play. You probably had a few lenders perform hard inquiries on your report to get the mortgage. You will also suddenly have a very large debt that you didn't have before, and your higher total debt load may make you seem like a credit risk.

Positive Credit Effect From Mortgage

Once the dust settles after you close on your house, if you pay on time and you pay every month as promised, your credit score will increase. As stated above, pay history makes up a whopping 35 percent of the calculation for your credit score. People who pay their bills as agreed and on time are a lower risk than those who do not. If you pay your mortgage on time every time, your credit will steadily get better.

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About the Author

Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D.