If you’ve ever pulled your credit report and/or score, you may have noticed that the lack of a mortgage could actually be holding you back from credit score perfection.
You may already have a seemingly great credit score, but the credit report “notes” may imply that a mortgage would further improve your credit score.
But before you run out and get a mortgage, it’s important to note that the impact may not be that substantial, and you certainly shouldn’t take out of a mortgage for the sake of your credit.
That would be plain silly.
Improving Your Credit Mix
So why would a mortgage help your credit? You’re taking on all that new debt. What gives?
Well, aside from the giant pile of new debt, when you take out a mortgage you essentially tell prospective creditors that you’ve made a very serious financial and lifestyle commitment. Yep, you’re a grownup now.
And most mortgages have terms of 30 years, so you’re not going anywhere fast.
With a mortgage, you automatically add stability to your credit profile, which is certainly a good thing.
On top of that, mortgages also tend to come in very high dollar-amounts, unlike credit cards or auto loans/leases.
Instead of getting a $10,000 credit line, you’re probably looking at a six-figure dollar amount, which suggests that you were creditworthy to begin with to obtain the mortgage.
This means a steady job, assets in the bank, and so forth.
Fico, the creator of the Fico score, actually considers “type of credit” as part of their scoring algorithm, and it accounts for 10% of your score.
So if your credit history consists of only credit cards, your Fico score will suffer, or at least not prosper as it should.
Again, it may still be great or “excellent” on paper, but without a mortgage, you may still be perceived as one-dimensional.
Heck, anyone can manage a few credit cards over the years, but those that manage their mortgage prove a lot more responsibility.
For these reasons, a mortgage could actually improve your credit score, though there’s no hard and fast number.
Of course, the presence of such a large loan could actually lower your credit score initially if you factor in the credit inquiry and the new debt.
Put simply, you’re more of a credit risk than you were before because you now owe a bank thousands upon thousands of dollars, and may have overextended yourself to some degree.
Mortgages Can Fortify Your Credit Score
But over time, that mortgage should reinforce your credit score and make you extremely attractive to new creditors.
If you make on-time mortgage payments each month, your score will rise and you’ll also prove that you can manage the largest amounts of debt thrown your way.
This means you’ll have a much easier time obtaining subsequent mortgages in the future, or refinancing your existing home loan, at least with regard to your credit history.
And smaller loans, like auto loans and credit cards, will be easier to obtain because creditors will have documented evidence that you can handle the largest loans out there.
With a mortgage in the mix and paid as agreed, your Fico score should tick higher and higher as more on-time payments are made.
At the end of the day, it’s not going to make or break your credit score, but it can help give you a little extra push.
Conversely, if you happen to miss a mortgage payment, prepare for a huge drop in your credit score.
That said, a mortgage is a privilege, and you must be responsible, or bear some pretty serious consequences.