Does Buying a Home Affect Your Credit Score?
If you’re in the midst of buying of a home, having a good credit score will help you obtain financing from a lender. When you reach your goal of purchasing a house, however, you might wonder what happens to your credit. Does buying a home affect your credit score? Does it help it or hinder it? Let’s find out and see what can happen to your credit score.
Understanding Credit & Debt
Two types of debt include installment loans and revolving credit. Revolving credit entails an open line of credit, such as a credit card that you make a fluctuating monthly payment on. Installment loans, which include personal, student, and home loans, remain fixed—in other words, you borrow a finite amount and make monthly payments.
Paying off revolving credit doesn’t require a plan. For a mortgage loan, however, you have a set plan that eventually results in a fully paid debt. Home loans can help your credit score, while credit card debt that continues to climb can negatively affect your score.
How Mortgages Affect Credit Scores
Good vs. Bad Credit
Many lenders look for credit scores of at least 620 for a conventional loan. Otherwise, you’ll have to find a loan with a higher interest rate. Loan scores consist of:
- Exceptional: 800+
- Very good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 579 and below
So while mortgages can help your credit score, establishing good spending habits will also increase your score and your chance of securing a lower-interest home loan. An improved credit score is a significant benefit for first-time home-buyers.
Credit Score Trajectory
Various factors can affect your credit score. When you first take out a home loan, your score can dip by 15 points or as many as 40, depending on your current credit score. This score change won’t show up immediately; you’ll see it on your credit report about a month or two after closing on the home. Allow about five months for your score to climb back up, as long as you maintain good spending habits.
The various methods of payment you use can affect your credit score. Credit cards, mortgages, and auto loans are significant factors in one’s credit score, but making payments on time is even more important. The more credit diversity you have, the better.
Raising Credit After Taking Out a Mortgage
After you’ve been approved for a loan, homeownership is on the horizon. You’ve proved that your financial history is stable and reliable. However, a few things can still hinder your credit score. Make sure you don’t miss payments or make late payments, apply for any new credit cards, close an existing credit card, or run up your credit card debts. Practicing good spending habits will prevent credit score hinderances.