Buying a house is the largest purchase most people make. You have probably spent months if not years planning for the day you’ll be able to buy your own house, which usually includes saving for a down payment, building a good credit history, and shopping around for the best rate and terms. Your next question may be “How does a mortgage affect my credit score?”
Getting a mortgage can have both positive and negative effects on your credit score. When you first apply for a mortgage, your credit score may drop slightly because of the new inquiry against your credit. This is usually a small dip of five points or less. Multiple inquiries in a short time are usually counted as one since it’s clear you were shopping for the best deal. Wait at least six months before applying for other types of credit such as a new car or a new credit card.
Your score may also drop slightly after your mortgage closes because the new debt is reflected on your credit report, but you haven’t yet had time to show you’ll make the payments as agreed. This is a temporary dip that won’t have a long-term effect on your credit score.
Benefits to Your Credit Score
As you pay your mortgage over time, you have the opportunity to build a record of on-time payments for 30 years. When a mortgage is added to a credit card, auto loan, or student loan account on your credit report, your credit mix improves since you are proving you can handle multiple types of credit. Over the life of the loan, the length of your credit history can improve since a mortgage is a long-term obligation.
Possible Harm to Your Credit
If you run into financial difficulties and are unable to make a payment, you may damage your credit. Mortgages usually have a grace period of 10 to 15 days before assessing a late charge. If you are more than 30 days late with a payment, it’s reported to the credit bureau and can have a long-lasting impact on your credit score.
A single late payment can damage your score, but even more serious damage is done if you have multiple payments that are 30, 60, or 90 days late. Multiple missed payments can lead to the lender foreclosing on your home.
Protecting Your Credit
Since your payment history is the biggest factor in the calculation of your credit score, it’s imperative that you always pay your mortgage on time. It’s a good idea to have a cushion in your savings account when you take out a mortgage to help protect you from unexpected situations. It’s also a good idea to check your credit report at least once a year to make sure everything on it is accurate.
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