When it comes time to buy a house, few people can afford to pay entirely in cash. Most opt for a mortgage, or a home loan. Like all major lines of credit, a mortgage will appear on your credit report. This is probably a good thing: A mortgage will likely build your credit in the long run, provided you routinely make on-time payments. Here’s why.
It diversifies your credit
Five factors influence your FICO credit score, which is the most common credit score used: payment history, amounts owed, length of credit history, new credit and types of credit. The kinds of credit you use — credit cards, auto loans, mortgage — affect a smaller portion of your score. In general, the more diversity, the better, and a mortgage adds to the mix.
It’s considered ‘good’ debt
Even though your mortgage is probably the biggest debt you owe, it’s considered “good” debt for two reasons. First, unlike with a credit card, there’s a physical asset backing the mortgage: your home. If you don’t make your mortgage payments, the lender can repossess the home. This makes mortgages a relatively safe investment for lenders. Second, having a mortgage shows you’re a responsible borrower, as long as you always make payments on time.
It’s an opportunity to build payment history
Payment history contributes to the largest portion of your credit score. Mortgages typically require 15 to 30 years of payments, which is plenty of time to slowly polish your score by making on-time payments. On the other hand, if you miss payments, expect a drop in your credit score.
Overall, a mortgage should build your credit, but it may cause a decrease at first. When you apply for a mortgage, the lender will check your credit to determine whether or not to approve you. This triggers a hard credit inquiry, which can temporarily lower your credit score by a few points.
Luckily, your score won’t suffer from multiple inquiries if you shop for mortgages within a 45-day period. The Fair Isaac Corp., the company that produces FICO scores, counts multiple inquiries within that timeframe as one inquiry.
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