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How Homeownership Affects Your Credit Score

Unless you’re buying your next house in cash, you need to finance part of the purchase (probably most of it) with a mortgage loan. That loan can have both positive and negative impacts on your credit score.

Those impacts appear as soon as you apply for your mortgage and continue until you sell the house or make your final payment on the loan. That’s why it’s important to understand exactly how homeownership affects your credit score and what you can do to minimize the potential negatives.

How Homeownership Affects Your Credit Score

Homeownership itself has no direct effect on your credit score. If you pay cash, credit bureaus and the creditors who check them are none the wiser. But if you take out a mortgage or home equity loan, you change the game.  

How Homeownership Appears on Credit Reports

The fact that you own a home doesn’t appear on your credit report, but mortgage-related credit inquiries and mortgages themselves do.

When you apply for a mortgage loan, the lender pulls your credit report. This is known as a hard inquiry. It appears on your credit report for two years.

When you close on a house, the mortgage appears on your credit report as an installment loan. If you later take out a home equity loan or line of credit, those appear on your credit report as well.

How Homeownership Impacts Your Credit Score

The effect is minimal, on the order of a few points. And while creditors can see it for two years, it only negatively affects your credit score for the first year. 

Fortunately, you can generally make as many inquiries as you’d like within a 45-day shopping period. During that time, you’re only dinged for a single inquiry, regardless of how many you make.

Another bonus is that having a mix of active installment loans and lines of credit (like credit cards) is a good thing. Your credit mix accounts for 10% of your rating and can eventually lead to a better credit score.

Unlike products like credit cards, your mortgage doesn’t impact your credit utilization ratio, which is the second-most important credit scoring factor after your payment history. 

How On-Time Mortgage Payments Affect Your Credit Score

Payment history is the most important credit scoring factor, accounting for 35% of the FICO formula. Every payment matters. Even one late payment on one loan can seriously damage your credit.

The best way to ensure you don’t accidentally miss a mortgage payment is to set up automatic payments on or before your monthly due date. Just ensure your payment account always has enough to cover your mortgage on the scheduled payment date.

If you miss a payment, schedule a makeup payment as soon as you realize what happened. Mortgage servicers typically wait at least 30 days from the due date to report a late payment, so you have some wiggle room.

Homeownership’s Credit Score Benefits

Homeownership can have long-term positive benefits for your credit — if you manage it appropriately. Those benefits flow both from: 

  • The fact that a home is a valuable asset you steadily own more of over time 
  • Special credit opportunities available only to homeowners

Homeownership as an Asset

Your home is probably the most valuable asset you’ll ever own. Owning a home doesn’t directly affect your credit, but loans and credit lines secured by the home can buoy your credit score if you use them responsibly.

Making timely payments on any and all home-related loans is critical. But the simple act of staying in good standing on a mortgage is a boon for your credit over time. Average account age is a vital credit scoring factor, meaning your mortgage sends an increasingly positive signal to would-be lenders as it ages.

Utilizing Home Equity Wisely

Unless you bought your home in cash and haven’t taken out any loans against it since, you don’t own the entire thing. The bank that holds your mortgage owns a share equal to the current balance on the loan. 

But you own the rest. That’s your home equity, an asset that for financial purposes is as tangible as the house itself. You can borrow against your home equity, most commonly through a home equity loan or line of credit. Like your primary mortgage, these credit accounts can boost your credit score as long as you make timely payments.

Then again, they’re not guaranteed to be positive influences on your credit. Maxing out a home equity line of credit may increase your credit utilization ratio beyond the recommended threshold of 30%. That could cause your credit score to decline unless and until you pay down your balance. Borrowing too much against your home equity could also constrain your cash flow, making it more difficult to stay current on other credit accounts.

Credit Opportunities for Homeowners

Homeownership opens up other credit-related opportunities unavailable to most renters. These opportunities all come back to the reality that as a property owner, you have free rein to improve your home within guardrails set by applicable laws, zoning codes, and homeowners association bylaws.

If you can’t pay for those improvements out of pocket or would prefer not to cover the costs all at once, you can finance them with credit opportunities primarily intended (or even exclusively available to) homeowners. Examples include:

  • Appliance loans. These are less common than they used to be, but some retailers still offer special financing on major appliance purchases. They’re usually installment loans with relatively short terms, typically between one and three years.
  • Store credit cards. Renters can shop at Home Depot too, but they’re less likely to make the sorts of big purchases that are often difficult to cover out of pocket.
  • Contractor financing. Home improvement contractors often offer project financing on bigger jobs. It’s usually an installment loan with a short to moderate term between one and seven years.
  • Specialty home improvement financing. Some organizations, typically private nonprofits or local and state government agencies, offer project financing for certain home improvements. Qualifying improvements generally have to improve the home’s energy efficiency or lower ownership costs in other ways, and they may be income-restricted. But they can be quite attractive, with below-market interest rates and long repayment terms.

Managing Other Debts While Owning a Home

If you’re trading up from a cheaper rental situation, homeownership can really crimp your budget. And if you’re not careful, that can negatively impact your credit. A lot rides on how you treat existing and new debts once you’re in your new home. 

Credit Cards 

Homeownership shouldn’t change your approach to managing your credit cards. Absent a true emergency, you should always pay off your credit cards in full each month to avoid paying hefty interest charges.

If your mortgage payment is higher than your previous rent payment, you might be tempted to break this rule and begin carrying credit card balances. You might feel like this is the only way to maintain your standard of living.

Resist this temptation. Carrying credit card balances is a sure way to spark a vicious cycle of debt that spikes your credit utilization ratio and increases your risk of missing a payment. Both can devastate your credit score.

Personal Loans & Other Debts 

Like credit cards, unsecured personal loans can have high interest rates. On the bright side, they’re installment loans, so payments are more predictable.

If you carry a personal loan into your time as a homeowner, keep paying it off as before. Think carefully about applying for a new personal loan. Once you have access to home equity, it’s usually cheaper and safer to borrow against it rather than take out a high-interest unsecured loan.

“Think carefully” applies to other types of debt as well. For example, even if you feel like you can afford a new car loan, adding one to your credit mix could negatively impact your credit utilization and depress your credit score. Buying used and paying for the whole thing out of pocket could be a smarter move in the long run.

Final Word

Homeownership isn’t inherently good or bad for your credit score. What matters is how you manage loans and lines of credit secured by your home, any debts you carry into your time as a homeowner, and any credit accounts you apply for after you move in.

That said, your mortgage does affect your debt-to-income ratio, which isn’t a credit scoring factor but is a major consideration for future lenders determining whether you can afford to carry a loan. Sooner or later, you’ll need to consider how your debt-to-income ratio impacts your creditworthiness as a whole.

Don’t worry too much. The bottom line to keep in mind is that if you manage your housing and nonhousing debts responsibly, homeownership is likely to boost your credit over time. 

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.