Many people aspire to own property because building equity in an asset that grows over time can speed up your path to financial freedom. Owning property can also give you a sense of belonging.
You’ll have your own place as well as more control over your home. However, your credit score will play a major role in your ability to obtain a mortgage.
Raising your credit score can help during the searching process, but what happens after you buy a house? Let’s take a look at how homeownership can impact your credit.
How does buying a house affect your credit?
Buying a house will affect your credit score. Most people finance their properties, make monthly payments and manage other obligations. Some homeowners see their credit scores rise over time, while others watch their credit scores dwindle. Understanding the major credit score categories will help you realize how buying a house affects your credit.
Payment history
Payment history is the largest category of your credit score, accounting for 35% of your overall credit. Paying loans and lines of credit on time will improve your payment history. Falling behind on mortgage payments will hurt your credit score since it affects your payment history. While on-time mortgage payments will be reported to the credit bureaus, it’s more difficult to get on-time rent payments to affect your credit.
Credit usage
Credit usage accounts for 30% of your credit score, and it all revolves around your credit utilization ratio. Borrowing less money, paying down your debt and having a higher credit limit will improve your score overall.
If you owe $1,000 in credit card debt and you have a $2,000 credit limit, you’ll have a 50% credit utilization ratio. This ratio can hurt your score. Consumers should aim for a credit utilization ratio below 30% to help their score, but a more optimal credit utilization rate is 10% or lower.
Length of credit history
Your credit history can get better with age. The length of your credit makes up 15% of your score, but you don’t have to do much to reap this benefit over time. Simply keep your old accounts open even if you no longer use them.
Credit mix
Taking on multiple loans and lines of credit will improve your credit mix, a category that represents 10% of your credit score. Keep in mind that you should not incur more debt for the sake of improving your credit mix since too much debt can hurt your payment history. A mortgage will improve your credit mix and increase your score in the process.
New credit applications
Credit applications often trigger hard inquiries, and mortgages are no exception. You will lose a few points from one of these inquiries.
A single hard credit check won’t devastate your score, but applying for many loans and other financial products over several months can add up. This problem is more common for people who apply for numerous credit cards at the same time. This category only represents 10% of your credit score.
Ways buying a house can help your credit
Buying a house can strengthen your status across multiple credit scoring categories. Here are a few ways that buying a home can impact your credit.
Your credit limit will go up after buying a house
A higher credit limit will help your credit utilization ratio. As you repay your debt, this ratio will continue to increase. You can tap into additional funds if you need to so that you can hit your credit limit but only do this as a last resort. Don’t view the higher credit limit as extra money that you can freely spend.
You’ll diversify your credit mix
A diverse credit mix will strengthen your score. A mortgage will demonstrate that you can maintain and balance the responsibility of having multiple types of debt.
On-time payments can boost your score
Paying your mortgage on time will improve your payment history. Consistent, early payments will help your score and show lenders as well as credit bureaus that you can repay your financial obligations in a timely manner.
Ways buying a house can hurt your credit
The home buying process presents many advantages, but homeownership can also deplete your credit if you are not careful. Here are some ways homeownership can hurt you.
Hard-credit inquiry
When you apply for a mortgage, the lender will do a hard inquiry on your credit report. This inquiry gives the lender more information to assess your debt management skills, but your credit score will drop a few points for a short period of time. While it’s not devastating, it is worth knowing about, but you will then have the home if you are approved for financing, so it’s a necessary evil in that regard.
Increase your debt
A higher debt can make it more difficult to manage payments. Falling behind on payments can create financial challenges and will hurt your credit score. A higher debt will also hurt your credit utilization ratio, but repayments will fix credit utilization over time.
How to improve your credit score to buy a house
Buying a home can improve your credit score, but you need good credit to obtain financing for a home. You can use these strategies to improve your credit score while you look for a home.
Pay off your credit card debt
Credit card debt holds many people back from financial freedom, and it also hurts your credit score. Between a high credit utilization ratio and late payments, credit card debt can cause a serious dent to your finances. Work on paying off your credit card as you look for homes.
Get a Credit Builder Loan
A Credit Builder Loan is a microloan with a one- to a two-year term. Most of these loans do not exceed $1,000. The primary purpose is to build your payment history, and our Credit Builder loans let you build credit with every on-time payment.
MoneyLion will report your payment history to the major credit bureaus. Unlike most credit builder lenders, MoneyLion lets you access a portion of your credit builder loan’s balance right away.
Review your budget
Tracking your income and expenses will facilitate healthy financial habits. Keeping costs low will strengthen your payment history and ensure you pay your debt on time.
Payment history is the largest part of your credit score, and keeping debt low will also help your credit utilization ratio. Those two categories combined make up 65% of your score. Budgeting can help you stay on track.
Homeownership and credit-building made easier
Buying a home can improve your credit score if you keep up with mortgage payments. A higher credit score can still help you even after you buy a home.
You can get better interest rates on future loans and apply for a refinance in the future. Homeownership and credit building can make a great pair.
FAQs
Will selling my house increase my credit score?
Selling your house will not impact your credit score. However, it can remove debt from your budget and make it easier to keep up with other obligations.
Does buying a house raise your credit score?
Buying a house can increase your credit score, but not right away. Mortgage payments will be reported, and if you pay on time, your score will increase.
How many points does a mortgage raise your credit score?
A mortgage has varying effects on a person’s credit. Your credit score won’t go up right away, but building payment history via the mortgage will improve your score over time. You will also get a quick boost from an improved credit mix.
Marc Guberti Marc Guberti is a USA Today and Wall Street Journal bestselling author with over 100,000 students in over 180 countries enrolled in his online courses. He hosts the Breakthrough Success Podcast where he teaches listeners how to grow their businesses and achieve personal transformations. He frequently writes about personal finance and covers investing on his YouTube channel.
Certainly! This article delves into the correlation between homeownership and its impact on credit scores. It covers various aspects of credit management and how purchasing a house can influence different credit score components. As someone familiar with credit systems and homeownership, here's a breakdown of the concepts covered:
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Equity Building through Property Ownership: Owning property is seen as a means to build equity in an asset that appreciates over time, contributing to financial freedom and a sense of belonging.
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Credit Score and Mortgage Acquisition: A crucial point is made about the importance of a good credit score when applying for a mortgage. It's highlighted that one's credit score significantly influences the ability to secure a mortgage.
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Impact on Credit Score After Buying a House: The article explores how buying a house affects various aspects of the credit score:
a. Payment History: Emphasizes that on-time mortgage payments positively impact payment history, a substantial portion (35%) of the credit score.
b. Credit Usage: Discusses how a mortgage affects credit utilization ratios and advises maintaining ratios below 30%, preferably at 10% or lower, to enhance credit scores.
c. Length of Credit History: Suggests keeping old accounts open to positively impact credit scores over time.
d. Credit Mix: Highlights that having a mortgage contributes positively to a diverse credit mix and can improve credit scores.
e. New Credit Applications: Discusses the impact of hard inquiries from mortgage applications on credit scores.
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Ways Buying a House Can Help Your Credit: Explores how homeownership positively influences credit scores by increasing credit limits, diversifying credit mix, and ensuring on-time mortgage payments.
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Ways Buying a House Can Hurt Your Credit: Discusses negative impacts such as hard-credit inquiries and increased debt load from homeownership.
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Improving Credit Score to Buy a House: Provides strategies to improve credit scores before purchasing a house, including paying off credit card debt, utilizing Credit Builder Loans, and budgeting effectively.
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Post-Homeownership Credit Improvement: Discusses how maintaining a mortgage and consistent payments can lead to better credit scores, potentially opening opportunities for better interest rates and future refinancing.
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FAQs on Homeownership and Credit Scores: Answers common questions regarding the impact of selling a house on credit scores, the immediate effect of buying a house on credit scores, and the specifics of how much a mortgage affects credit scores.
The author, Marc Guberti, is highlighted for his expertise in personal finance, investing, and business growth. His insights likely contribute to the article's credibility and reliability on these subjects.
