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For many people, paying off their mortgage is the ultimate financial accomplishment. While “mortgage burning celebrations” may not be common now that everything is handled digitally, most do feel proud of a home that is paid for in full. Imagine, then, the disappointment to learn that your credit scores have gone down, not up, as a result of making that final mortgage payment. One of our readers, who goes by the screenname “Kitten” shared her frustration on the Credit.com blog:

It’s too bad I don’t get credit points for having my mortgage paid off. I get penalized because I don’t have a mortgage!

And another reader echoed her concerns:

I have gotten explanations as to why credit score wasn’t higher, and one of the reasons why was “too few active mortgage accounts.” The implication here is that if you pay off your mortgage, your score will be lower than if you didn’t pay it off.

Dale commented that his credit score seems to have been hurt by the fact that he paid off his mortgage years ago, and Mel complained that his scores dropped by over 70 points after he paid off his mortgage and another loan.

Does it hurt your credit scores to pay off your mortgage, and can you have an excellent credit score without one?

The answer to the second question is a definitive “yes;” you can earn a high credit score without a mortgage. “Consumers with no mortgages can build excellent FICO Scores by consistently paying their bills on time, managing their revolving debt responsibly, and judiciously applying for new credit,” said FICO spokesperson Jeffrey Scott in an email. Similarly, it is possible for consumers to get the “maximum credit score” under the VantageScore model without a mortgage, as long as the consumer does an excellent job maintaining all of their other accounts, says Sarah Davies, Sr. VP, Analytics, Product Management and Research with VantageScore. “Building a high VantageScore credit score is certainly achievable without a mortgage loan,” she writes in an email. 

The answer to the first question, “does it hurt your scores to pay off your mortgage?” is a bit more nuanced as we’ll explain in a moment.

A mortgage loan is a type of installment account. These loans generally refer to loans for fixed amounts and with fixed repayment periods. Other examples include student loans and auto loans. (Contrast those with “revolving accounts” such as credit cards, which offer a line of credit where the consumer can borrow as much as they like up to the limit, and make small payments or pay them off in full.) 

What’s most important when it comes to installment accounts is whether you’ve paid on time, the loan amount, and how long you’ve had the loan. “The score formula looks at those factors no differently than any other installment loan,” says Barry Paperno, credit expert at SpeakingOfCredit.com, formerly with FICO and Experian. “It would be on par with a student loan or an auto loan, for example.” 

While it’s not necessary to have a mortgage in particular, the fact that a lender extended you a large loan can be helpful. “Higher loan amounts signals that lenders are willing to trust the consumer more,” Davies explains. 

A mortgage that has been paid off stills contribute to a positive credit score. The payment history will typically be reported for 10 years after it is closed, and still “counts” when your payment history and age of accounts is evaluated. “A paid-off mortgage is still considered by the FICO Score when assessing payment behavior and length of credit history,” Scott notes. “In particular, a paid-off mortgage with an unblemished payment history will continue to positively impact a person’s credit score.” 

Don’t Sweat the Small Stuff 

What about the fact that these readers both feel they’ve been “penalized” for not having a mortgage with a balance? For one thing, their scores may have declined after they made the final payment because they no longer have any open installment accounts on their credit reports. This means they may not be earning the maximum available points for the factor referred to as “credit mix.” 

“Many credit score models are looking for an open installment accounts,” explains Paperno. “It’s one of the few areas where an open account in and of itself is a plus to your score versus a closed.” But in that scenario, any open installment account  – even a 0% auto loan – could be beneficial. 

The other reason some homeowners feel they’ve been harmed by their paying their home loans in full is that they’ve been told that. When consumers get their credit scores, they are often given explanations – called “reason codes” – that explain the main factors affecting their credit scores. The higher the credit score, the more cryptic – or sometimes even bizarre – these reasons may seem. If you’re generally doing everything right – paying on time, keeping balances low, etc. – it is hard to point out what you’re doing “wrong” in these factors. While a lack of an open mortgage may be listed, it doesn’t mean they have to get a mortgage. 

In other words, it may be a factor in the score, but not necessarily a major factor. “If that’s your only installment account, (paying it off) might just impact your score by 10 – 15 points,” says Paperno. 

Still, getting a mortgage when the time is right can assist a consumer trying to build their credit. Davies says that “for consumers with high VantageScore credit scores it doesn’t make a difference,” whether or not you have a mortgage. But “for consumers with middle and lower (ones), having a significant loan, like a mortgage, that you continue to pay on time can help to improve your score.” 

While it may feel unfair to pay off a mortgage and see your credit scores dip, keep it in perspective. Your home is paid in full, which means your debt is likely under control. Keep paying the credit cards and loans that are still open on time and you should be able to build a credit score that gets you what you need when you need it. You can find out where you stand by checking your credit scores, which you can do for free every month on Credit.com.

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