Home > Credit 101 > How a Mortgage Can Help (or Hurt) Your Credit

Comments 3 Comments

Will a mortgage help — or hurt — your credit? If you’re thinking, “Well, both,” you’re exactly right. But there are subtleties involved that may surprise you.

To get a mortgage these days, a lender is going to closely scrutinize your income, debt, and credit history before giving you the loan. That makes a mortgage a sign of financial responsibility that can help your credit scores, says Sarah Davies, senior vice president, risk and analytics, for VantageScore. “They see you as a highly creditworthy consumer,” she says.

“You might notice that most credit reports single out mortgages in their own category, separate from installment loans and revolving loans,” Steve Ely, CEO of eCredable points out. “Lenders looking beyond the credit score want to quickly see how well you’re doing living up to this obligation. For example, if you are responsible enough to take on a mortgage, and can make the ongoing payments on time, you are rewarded by having your credit score increased over time.”

Another way a mortgage can help your credit is by rounding out your credit history. “Over the long term, adding a mortgage to your credit report can improve your credit “mix” if, for example, your credit report only contains revolving (typically credit card) accounts,” explains Barry Paperno, community director for Credit.com and an expert in credit scoring. “Having multiple types of credit — revolving and installment — indicates you’re able to manage different types of credit products, and leads to lower risk.”

But that’s not a huge advantage he warns, since only about 10% of your score is based on your mix of credit. (He’s talking primarily about FICO scoring models here.) “Don’t expect the addition of a mortgage to add more than a few points to your score even under the best of circumstances.”

What about homeowners who have paid off their mortgages? While that may be the smart thing to do financially, it’s not likely to mean a boost to your credit scores. While a paid-off mortgage is still considered when your credit scores are calculated, “it doesn’t play as significant a role,” as one that is still in repayment, Davies warns. One reason for that is that the scoring model can’t tell if the homeowner paid the loan off or simply refinanced it.

And what about the size of the loan? Is it better to have a larger mortgage? That may help a little bit, Davies says. But by the same token if you fall behind, the hit to your scores can be greater.

And, yes, a mortgage can also hurt your credit. The millions of Americans who have missed payments or lost their homes to foreclosure in recent years know that firsthand. Miss a mortgage payment and your scores may drop significantly.

A VantageScore report explains it this way: For most credit card models, missing a credit card payment has less impact than missing a mortgage or auto payment. This is because credit score models consider late payments on your larger, secured debts as higher risk than being late on smaller, unsecured debts such as credit cards.

“The bigger the asset, the more foundational it is, and the bigger the hit to your credit score,” warns Davies.

But even if you’ve made all your payments on time, there is another way a mortgage can impact your credit scores. It’s due to the way new accounts impact your scores. Paperno explains:

The immediate impact upon adding a mortgage (or any new account) to your credit report is usually a drop in your score. Research has shown that a consumer who has opened a new account recently is more likely to have problems paying on time in the future than someone who has no recently opened accounts. Fortunately, any points lost for this reason tend to be regained within six months after opening the new account, provided all payments are made on time, account balances are kept low and additional new accounts are opened only as needed.

Ultimately, like most types of credit, a mortgage can help your credit if you manage it well and make the payments on time. That may be easier said than done for some these days, but if your goal is a strong credit score, it’s worth keeping in mind.

Image: Caitlin Childs, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team