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 increase your credit score 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 10% 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 (35%). Mortgages typically require 15 to 30 years of payments, which is plenty of time to slowly increase your score by making on-time payments. On the other hand, if you miss payments or make late ones, your credit score will decrease.
Overall, a mortgage should improve your credit score, 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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